O EPA Industry Profile for the Metal
Products and Machinery
Industry (Phase 1)
Dr, Lynne G. Tudor, Economist
Economic and Statistical Analysis Branch
Engineering and Analysis Division
Office of Science and Technology
U.S. Environmental Protection Agency
Washington, DC 20460
-------
-------
ACKNOWLEDGEMENTS
Credit must be given to Bill Cleary and the whole MP&M team for their professional
manner, conscientious effort, and contributions, and to Helen Jacobs for her statistical
support.
Credit must also be given to Abt Associates for their assistance and support in
performing the underlying analysis supporting the conclusions detailed in this report. Their
study was performed under Contracts 63-CO-0080, 68-C3-0302, and 68-C4-0060.
Additional information uised in this document was provided by SAIC under contract
68-C4-0046
-------
-------
TABLE OF CONTENTS
Chapter 1. Overview of Profile Concepts and Sources
1.1 Introduction 1.1
1.2 Overview of Profile Concepts and Associated Data 1.2
1.3 Profile Data. Sources and Related Analytic Issues 1.6
Chapter 2. Summary Profile of the MP&M Industry 2.1
Chapter 3. Summary Profile of the MP&M Phase I Industry 3.1
Chapter 4. Analysis of Cost Pass-Through Potential 4.1
Chapter 5. MP&M Sector Profiles
5.0 Introduction 5.1
5.1 Sector 1: Hardware 5.3
5.2 Sector 2: Aircraft 5.16
5.3 Sector 3: Electronic Equipment 5.27
5.4 Sector 4: Stationary Industrial Equipment 5.39
5.5 Sector 5: Ordnance 5.52
5.6 Sector 6: Aerospace 5.62
5.7 Sector 7: Mobile Industrial Equipment 5.72
Appendix A. §308 Survey (Economic and Financial Component) A.I
Appendix B. Partial Cost Pass Through Methodology B. 1
Appendix C. Timing of MP&M Industry Economic Impact Analysis
Relative to U.S. Business Conditions C. 1
C. 1 Introduction C.I
C.2 Growth in Gross Domestic Product, 1979 to 1989 C.I
C.3 Growth in MP&M Shipments, 1979 to 1989 C.3
Appendix D. Statistical Analysis of Financial Measures for
MP&M Industry Facilities D.I
D.I Introduction D.I
D.2 Structure of Analysis D.I
D.3 Data Used in Analysis D.7
D.4 Findings D.7
References. Ref.l
-------
-------
Chapter 1
Introduction and Summary of Profile Findings
1.1 Introduction
This profile compiles and analyzes economic and financial data for the Metal Products and Machinery
industry and presents a detailed profile of the seven Phase I sectors that manufacture, rebuild and repair metal
products and machinery. It supports the companion document, the Economic Impact Analysis of Proposed
Effluent Limitations Guidelines and Standards for the Metal Products and Machinery Industry (EIA), by
expanding upon and presenting evidence for industry characterizations given in Chapter 3 of the EIA. The data
for this analysis include financial and operating data obtained from a sample of facilities in the MP&M industry
and secondary source data from various publications. The purpose of the profile is to provide a general
understanding of the structure and performance of the industry, and, in particular, to provide insight into the
ability of the industry to absorb possible costs or savings associated with the proposed effluent limitation
guideline. Thus, a key element of this profile is the analysis of the likely extent to which industry groups can pass
on to customers the increased costs of compliance as price increases. The results of this cost pass-through
analysis are used in analyzing the economic and financial impact of alternative regulatory options on the MP&M
industry. The profile also supports other elements of the EIA. In particular, profile data and analyses are used
to support the analyses of small business impacts, employment effects, and foreign trade effects.
hi the following sections, this introduction first provides an overview of the economic concepts and
associated data items that are reported in the profile and then reviews the profile data sources and certain issues
associated with interpreting and using the data. A summary of the profile findings follows these discussions in
Chapters 2 through 4. Chapter 2 gives an overview of the entire MP&M industry, including both Phase I and
Phase II industries. Chapter 3 summarizes and compares data at the sector level for Phase I sectors alone.1
Chapter 4 summarizes the methodology and findings from the cost pass-through analysis. Detailed profile
discussions for each of the seven Phase I MP&M sectors follow, in Chapter 5.
This document also contains four appendices: Appendix A, the economic portion of the Section 308
survey (the Survey); Appendix B, a detailed discussion of the methodology used for the analysis of cost pass-
'Except as noted, Chapters 2 and 3 pertain to both water-dischargers and non-water dischargers.
1.1
-------
through capability; Appendix C, an analysis of economic conditions both in aggregate and in the MP&M industry
sectors for the period in which the effluent guideline economic impact analysis is based; and Appendix D, a
statistical analysis of the relationship of financial performance in MP&M Phase I sectors to facility business
characteristics.
1.2 Overview of Profile Concepts and Associated Data
The data and analyses presented in the profile involve several major economic concepts that are
important in understanding the structure and performance of an industry and its likely economic and financial
responses to regulatory requirements. This section summarizes these concepts and the related data items that are
presented in the profile analyses which follow.
1.2.1 Output and Economic Activity
This profile refers to a number of measures of output and overall economic activity. When viewed over
a scries of years, these measures provide insight into the overall economic health and outlook for a sector. For
example, several MP&M sectors exhibit a persistent downward trend in output, described as secular declines.
Firms in industries experiencing secular declines are likely to have more difficulty absorbing increased costs than
Grms in industries that are experiencing long-term growth. Output measures also indicate business cycles and
shocks, which put the current condition of an industry in context. Hypothetically, poor financial performance in
a cyclical trough or during a non-recurring shock might suggest that some of the apparent weakness of the
industry is transient and not a reliable basis for predicting future responses to regulatory compliance costs.
The two most common measures of manufacturing output are value of shipments and value added.
Value of shipments is the sum of the receipts a manufacturer earns from sales of all its outputs. Similar to
revenues, value of shipments is a useful indicator of the overall size of a market or the size of a firm in relation
to its market or competitors. To measure the amount of production activity in a firm or market, though,
economists often use value added, which is the difference between the value of shipments and the value of inputs
used to make the products that it sells. This is the value of the production activity that occurred in a particular
firm or market For example, if a gem polisher sells a polished diamond, the revenue from that sale is included
in value of shipments. However, the polisher presumably paid some large amount of money for the unpolished
diamond. The difference between the polished diamond's selling price and the cost of purchasing the unpolished
diamond is value added. It is literally the gem polisher's addition to the diamond's value.
1.2
-------
Although the profiles present the value of shipments for each MP&M sector, they also show value added,
and it is the latter that the profiles will rely upon as the principal measure of output. When value added is
adjusted for inflation, it is called real as opposed to nominal value added, and, for this analysis, it is presented
in constant 1989 dollars.2 The growth rate of real value added is considered an important measure of a sector's
overall economic health and its ability to manage the financing requirements and additional operating costs of
an MP&M effluent guideline. Value of shipments, on the other hand, serves as a measure of revenues; the profile
uses shipments most frequently to indicate the size of a market and how the size differs from year to year, rather
than to indicate intensity of production.
Additional measures of the level and trend of activity in a sector that are important in the profile include
employment and labor productivity. Employment is the total number of full-time equivalent employees,
whether production workers or non-production workers. Labor productivity combines employment with output
by measuring how much output is produced by each unit of labor, on average. It is calculated as value added
divided by production hours. These measures indicate how an industry uses labor as an input in the production
process, and, in a dynamic context, provide insight into the outlook for an industry and employment in the
industry. Changing patterns of labor utilization relative to output are particularly important in understanding how
regulatory requirements may translate into job losses both in aggregate and at the community level.
The profile also examines capacity utilization and new capital expenditures to indicate potential excess
or insufficient capacity, which in turn can help anticipate new investment. During periods of rapid capital
turnover or capacity addition, the economic cost of compliance may diminish or even vanish. For instance, if an
industry had been using its capital resources at nearly their maximum capacity and had been consistently spending
on new capital purchases, then some facilities in that industry might comply with effluent guidelines by
proceeding with previously planned capital improvements, possibly at no additional cost compared to
expenditures in the absence of effluent guidelines.
1.2.2 Competitiveness in International Markets
Competitiveness in international markets is especially significant in assessing the impact of a proposed
regulation because some regulations affect U.S. and foreign firms differently, hi particular, if effluent guidelines
2The Survey primarily gathered data for 1989.
1.3
-------
raise the cost of manufacturing for U.S. but not foreign firms, U.S. firms might have difficulty passing on
compliance costs. This profile uses two measures of foreign competition.
Export dependence is the export share of shipments, calculated by dividing exports by value of gross
shipments. Import penetration is the value of imports compared to shipments in the US3; it is calculated by
dividing imports by the sum of shipments for domestic consumption and imports. To the extent that foreign
manufacturers would not be subject to the same compliance costs as those imposed on domestic manufacturers,
higher values of export dependence or import penetration indicate stricter price discipline and decreased ability
of U.S. manufacturers to raise prices.
1.2.3 Financial Performance and Condition
Measures of financial performance and condition are important for understanding the ability of an
industry to manage the financing requirements and compliance costs that accompany a regulation. Operating
margins summarize the relationship between input costs and the value of production and indicate the extent of
competitive market pressures in an industry. Operating margins also provide a measure of the operating profit
that may be used to absorb compliance costs. Other things being equal, industries and firms with lower operating
margins will generally have less flexibility to absorb costs associated with a regulation than those with higher
operating margins.
Pre-tax return on assets (PTRA), which measures the profitability of all capital deployed in a firm
or industry, is also used as a measure of profit performance and ability to manage compliance cost burdens. In
addition, PTRA is used as a measure of the economic profit of an firm or industry. Economic profits are the
difference between a firm or industry's accounting profitability, less a risk premium, and the rate of return on the
best risk-free alternative to the investors — usually a government security. The presence of economic profits
indicates the extent of market power that may be used by an industry or a firm to pass on compliance costs to
customers. In theory, positive economic profits cannot persist without entry and exit barriers; otherwise, firms
would enter the industry and diminish profits to normal levels. Entry and exit barriers, in turn, yield market
power. Therefore, positive economic profits signal an increased likelihood that a manufacturer will be able to
pass compliance costs on to its customers. To help calculate economic profits, the profile uses a conventional
Note that, since the denominators differ for these two measures, equal but non-zero values of export dependence and
import penetration correspond to a trade deficit. That is, an industry with a 10 percent import penetration ratio and a 10
percent export share is experiencing a trade deficit. The ratios were designed this way because they give a better view of
a firm's competitive standing, for the purpose of the cost pass-through analysis.
1.4
-------
measure of riskiness, a firm's P -coefficient, measures the covariance of a firm's financial performance with that
of its entire market, p-coefficients were assembled for those facilities whose parent firms were listed in the Value
Line financial database, a publicly available publication.
Profitability and debt structure figure prominently in assessing a firm or industry's ability to incur the
operating and capital costs of compliance. The interest coverage ratio (ICR), which is reported in this analysis,
measures the extent to which a firm's operating cash flow exceeds its existing interest obligations. Analysis of
the ICR provides information on the ability of a firm to finance the capital expenditures required by effluent
guidelines.
The profile also presents two measures of indebtedness. The debt-to-asset ratio (DAR) is the ratio of
all liabilities to all assets of a firm. A high DAR indicates that the firm is heavily indebted and might have
difficulty financing new debt. The current ratio (CR), which measures the ratio of current assets to current
liabilities, reflects a firm's short-term liquidity. These two measures can help assess a firm or industry's ability
to meet regulatory compliance costs.
The PTRA, ICR, DAR and CR data in this profile are based upon the 396 facility responses to the
Survey. Theses facility responses are multiplied by sample weights to represent the entire population of 10,601
effluent dischargers that are expected, to be subject to the proposed effluent guideline.
1.2.4 Industry Concentration and Structure
Information on industry concentration and structure is also important for understanding the likely
presence of market power and ability of firms to pass on compliance costs to customers. Horizontal
concentration, which is the degree to which industry output is concentrated in a few large firms, is closely related
to entry and exit barriers. This profile uses the eight-firm concentration ratio (CRg), published by the
Department of Commerce. The CRg, is the share of an industry's shipments accounted for by the eight largest
firms in that industry. Higher values of CRg mean that the largest firms are more likely to be able to manipulate
market prices to their advantage in the face of compliance costs.
The same reasoning applies to vertical concentration as an indicator of cost pass-through capability.
Vertical concentration refers to the integration within a firm of several industries that supply to and demand from
each other in the production stream. For instance, the merger of an airplane manufacturer and a jet engine
1.5
-------
manufacturer wodd mcrease vertical concentratioa However, there are no accessible, direct measures of vertical
concentration that would correspond to the CRg.
Instead, taking advantage of the fact that as a firm integrates vertically it participates in more kinds of
activities, this profile uses the specialization ratio as an indirect measure of vertical integration. The
specialization ratio is the percentage of an industry's production accounted for by commodities within the
industry's scope, and provides a limit on the possible extent of vertical integration in an industry. The higher the
specialization ratio, the lower the possibility for vertical integration. An industry with a specialization ratio of
100 percent would, by definition, have no presence in any industry other than its primary industry. In contrast,
a low specialization ratio indicates that much of an industry's output is production of goods or services other than
its primary output; therefore, there is a heightened possibility that the industry is more vertically integrated than
an industry with a higher specialization ratio4. However, the specialization ratio is not a proportional measure
of the absolute magnitude of an industry's vertical integration.
Finally, to support the small business analysis, the profile examines how economic performance varies
according to employment size. This helps to expose some of the size-related differences in output, labor intensity
and capital growth within an industry group. Such an analysis may highlight situations in which smaller
businesses are likely to be at a financial or economic disadvantage in meeting the costs associated with an effluent
limitation guideline.
1.3 Profile Data Sources and Related Analytic Issues
Data for the profile analyses include primary source financial data gathered from a sample of facilities
in the MP&M Phase I industry and a variety of secondary source data from publicly available publications. The
primary source data reflected in this profile analysis come from 396 responses to the Section 308 Survey. The
Survey data include detailed facility financial and operating information for the period 1987-1989 that aid both
in understanding the industry that will be subject to regulation and in performing the economic impact analysis
of effluent guideline regulations. The largest single source of secondary source data was the Department of
Commerce, which publishes the Censuses of Manufacturers, Annual Surveys of Manufacturers, and provided
electronically transmitted trade data. Also, the Department of Commerce's Bureau of Economic Analysis recently
4A low specialization ratio creates only the possibility for vertical integration because firms in that industry might
participate in industries that are economically unrelated to its primary industry. For instance, if aerospace firms derive
40 percent of their revenues from farming, they would have a low specialization ratio of 60 percent. However, they
would not be vertically integrated, because farms do not significantly sell to or buy from aerospace firms.
1.6
-------
released the 1982 Benchmark Input-Output Tables of the United States, which provided the input coefficients
used in estimating the historical relationship between input costs and output prices. The Bureau of Labor
Statistics, in the Department of Labor, provided producer price index time series that were used to deflate current
dollar values and were also used in the econometric analysis of input costs and output prices. The profiles also
drew from qualitative analyses in the U.S. Industrial Outlook, published by the Department of Commerce, the
Dun & Bradstreet Million Dollar Directory and the Value Line Investment Survey.
Secondary source data spanned the years 1982 through 1991, inclusive, except for import and export
data, which were gathered for 1991 only.5 The selected time period follows a business cycle, ending around the
most recent trough. Most quantitative secondary source data for the years 1982 and 1987 are based on the
Census of Manufacturers. The data for the remaining years are based on the Department of Commerce samples
that generate data presented in the Annual Surveys of Manufacturers.
In 1987, the Department of Commerce began using a revised Standard Industrial Classification (SIC)
scheme. These redefinitions made data for some 4-digit codes non-comparable with pre-1987 data. Continuous
series of consistent data were generated for value of shipments and value added by extrapolating from 1987
output using post-1987 growth rates. However, this methodology has not been extended to all of the data
measures gathered from secondary sources. The profiles present some data either in parts or not at all, for those
few SIC codes in which the redefinitions introduced particularly serious distortions. To the extent possible,
qualitative information from the U.S. Industrial Outlook was used to ameliorate the loss of information from the
SIC redefinitions. This problem does not affect the cost pass-through elasticity estimates, since they are based
on cross-sectional parameters measured in a particular year.6
The survey of MP&M Phase I facilities covered the years 1987 through 1989. Some responses included
data from subsequent years. These data were excluded in order to protect the integrity of the sample design. An
important issue concerns the reasonableness of using Survey data from the particular years, 1987-1989, as the
5Also, the Producer Price Index time series covered different years for different commodities. Mean values substituted
for missing time series. Missing values in partial time series were replaced by regression. Adjusted in this way, the PPI
spanned the requisite years.
6This is true of the 10-year average annual growth rate parameter, as well as the other parameters. The 10-year growth
rate is specific for the set of years over which it is calculated. Distortion due to the SIC redefinition affects all the sectors
and is unlikely to change the ranking of growth rates among sectors.
1.7
-------
basis for the MP&M effluent guideline impact analysis. If the period for which data were gathered was not a
period of typical economic performance for the industries under analysis, then the economic impact analyses
based on these data may yield misleading results. For example, if the period was one of unusually strong
performance, then analyses based on the Survey data may overstate industry's ability to meet the financial
requirements of compliance; alternatively, analysis based on data from a period of weak performance may lead
to overly pessimistic conclusions about industry's ability to meet compliance requirements. To address this issue,
an analysis was undertaken of the performance of the aggregate economy and the MP&M sectors over the 1980s
decade and with a specific focus on the 1987-1989 Survey data collection period. This analysis, which is reported
in Appendix C, indicates that the data period should provide a reasonable "snapshot" of the MP&M industry
group for a typical set of operating years and thus should provide a reasonable basis for the economic impact
analysis.
For the sector-related presentations and analyses of data in the profile, secondary source data were
aggregated to the MP&M industry sector level. Most secondary source data aggregated to the sector level in a
straightforward way. The MP&M industry group encompasses 163 4-digit SIC codes among its 15 sectors. The
Phase I sectors include 100 of these 4-digit SIC codes. Each sector corresponded to a unique and non-
overlapping set of 4-digit codes. Thus, any data indexed by 4-digit SIC codes could be aggregated by sector by
mapping data for the 163 MP&M industries to the corresponding sector. The direct requirements coefficients
from the input-output (I-O) tables, however, were indexed by the Bureau of Economic Analysis' own
classification scheme, designated elsewhere in this report as BEA or I-O codes. The BEA provided a
concordance, but the mapping of BEA to SIC codes was not one-to-one, so the application of direct requirements
coefficients to 4-digit SIC industries or MP&M sectors required professional judgment.
The economic portion of the Survey included no information about the SIC code belonging to the facility
or firm because pretesting revealed that facilities frequently did not know their correct SIC codes or sold the same
product to multiple industries. Some pretest facilities indicated their parent firms' classification, which might not
accurately describe the respondent facilities' sources of revenue. Some gave outdated or otherwise inaccurate SIC
codes. However, the survey did ask the facility to estimate the share of its revenues accounted for by products
in each of the 15 sectors. The respondents classified themselves based in part on a subjective interpretation of
the sector definitions.7 Each facility was assigned to the sector that accounted for the largest part of its revenues.
'The sector profiles in this document, however, are based on sectors strictly defined by 4-digit SIC definitions.
1.8
-------
In 83 percent of cases, facilities indicated that more than 95% of their revenue came from one sector. The
engineering portion of the Survey asked for a list of each facility's 4-digit industry classifications, but the industry
codes were not listed in order of importance, and, when compared to more detailed engineering data, these self-
reported SIC codes did not appear to be accurate. Similarly, SIC codes from the mini-DCP8 appeared flawed.
8The mini-DCP or mini-Data Collection Portfolio was a preliminary questionnaire that preceded the §308 Survey that
provided the data for much of the EIA.
1.9
-------
-------
Chapter 2
Summary of Profile of the MP&M Industry
Metal Products and Machinery (MP&M) Phase I encompasses a large and diverse group of industries
that principally manufacture intermediate goods used by other industries, as well as lesser amounts of final goods
such as household electronics, hi addition to manufacturing, the MP&M Phase I industry also includes some
repairing and rebuilding activities. Table 2-1 lists the seven Phase I sectors and their associated 4-digit SIC
industry groups.
All 396 facilities in the Survey sample operate in at least one Phase I sector, though some facilities
produce in both Phase I and Phase n, and some Phase I products are identical to some Phase II products. For the
profile and EIA, facilities were assigned to the Phase I sector from which they received the most revenue.
While final consumers buy some MP&M products, the largest part of the demand for MP&M output
comes from construction and manufacturing industries, which are both pro-cyclical components of the economy.
MP&M output changes generally coincide with but also show greater amplitude than fluctuations in the general
economy. During recessionary years, customer industries can disproportionately reduce their purchases of many
new MP&M products by deferring purchases and increasing maintenance and repair activities on existing capital
goods. Thus, economic downturns tend not only to decrease MP&M revenues disproportionately but also to shift
revenues between activities. Similarly, robust economic growth has historically accompanied disproportionately
strong growth in MP&M output.
This chapter presents aggregate profile data and analytic results for the entire 15-sectorA4P&Mindustiy
group, including both water users and non-water users, with the exception of data that are based on the Survey
responses. Financial and other data that are based on Survey responses apply only to Phase I facilities. Following
this aggregate discussion, Chapter 3 considers profile data and analytic results for the seven Phase I sectors only.
Chapter 4 presents an overview of the cost pass-through methodology and summarizes the results of tiiat analysis
for the seven Phase I sectors. All of the data presented in this profile document constitute a baseline description
of the MP&M industries, exclusive of the effects of proposed effluent guidelines.
2.1
-------
Table 2-1. Phase I and Phase H MP&M Sectors and SIC Codes
Number of SIC
Groups
I Total
II Phase I
By Sector 4-Disit Standard Industrial Classification Groups
Sector 1. Hardware
I
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
2796
3398
3412
3421
3423
3425
3429
3433
3441
3442
3443
3444
3446
3448
3449
3451
3452
3462
3466
3469
3492
3493
3494
3495
3496
3498
3499
3541
3542
3544
3545
3546
3965
Platemaking & Related Services
Metal Heat Treating
Metal Shipping Barrels, Drums, Kegs, Pails
Cutlery
Hand & Edge Tools, Except Mach. Tools, Saws
Hand Saws and Saw Blades
Hardware NEC
Heating. Equipment Except Electric. & Warm Air Furnaces.
Fabricated Structural Metal
Metal Doors, Sash & Frames
Fabricated Plate Work (Boiler Shops)
Sheet Metal Work
Architectural and Ornamental Metal Work
Prefabricated Metal Buildings & Components
Miscellaneous Metal Work
Screw Machine Products
Bolts, Nuts, Screws, Rivets, and Washers
Iron and Steel Forgings
Crowns and Closures
Metal Stamping NEC
Fluid Power Valves & Hose Fittings
Steel Springs ;
Valves & Pipe Fittings, Except Brass
Wire Springs
Miscellaneous Fabricated Wire Products
Fabricated Pipe and Fabricated Pipe Fitting
Fabricated Metal Products NEC
Machine Tools, Metal Cutting Types
Machine Tools, Metal Forming Types
Special Dies & Tools, Die Sets, Jigs, Etc.
Machine Tool Access & Measuring Devices
Power Driven Hand Tools
Fasteners, Buttons, Needles, etc
Sector 2. Aircraft
34 1 3721 Aircraft
35 2 3724 Aircraft Engines and Engine Parts
36 3 3728 Aircraft Parts and Auxiliary Equipment
37 4 4581 Airports, Fields & Terminals
\lSector3. Electronic Eauwment
38
39
40
41
42
43
44
45
46
1 3661 Telephone & Telegraph Apparatus
2 3663 Radio & TV Broadcasting & Communications Equipment
3 3669 Communications Equipment NEC
4 3671 Electron Tubes
5 3675 Electronic Capacitors
6 3677 Electronic Coils and Transformers
7 3678 Connectors for Electronic Applications
8 3679 Electronic Components NEC
9 3699 Electronic Mach., Equipment, & Supplies. NEC
2.2
-------
Table 2-1. Phase I and Phase n MP&M Sectors and SIC Codes
Number of SIC
GroiiDS
Total By Sector
4-Digit Standard Industrial Classification Groups
Sector 4, Stationary Industrial Equipment
47
48
49
50
51
52
53
54
55
56
57
58
59
60
61
62
63
64
65
66
67
68
69
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
Sector 5,
86
87
88
89
Sector 6,
90
91
92
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
Ordnance
1
2
3
4
Space
1
2
3
3511
3519
3533
3534
3535
3543
3547
3548
3549
3552
3553
3554
3555
3556
3559
3561
3562
3563
3564
3565
3566
3567
3568
3569
3581
3582
3585
3586
3589
3593
3594
3596
3599
3612
3613
3621
3625
3629
3641
3482
3483
3484
3489
3761
3764
3769
Steam, Gas, Hydraulic. Turbines, Gen. Units
Internal Combustion Engines NEC
Oil Field Machinery and Equipment
Elevators and Moving Stairways
Conveyors and Conveying Equipment
Industrial Patterns
Rolling Mill Machinery and Equipment
Electric & Gas Welding & Smoldering Equipment
Metal Working Machinery NEC
Textile Machinery
Woodworking Machinery
Paper Industries Machinery
Printing Trades Machinery and Equipment
Food Products Machinery
Special Industry Machinery NEC
Pumps and Pumping Equipment
Ball and Roller Bearings
Air and Gas Compressors
Blowers and Exhaust and Ventilation Fans
Industrial Patterns
Speed Changers, High Speed Drivers & Gears
Industrial Process Furnaces and Ovens
Mechanical Power Transmission Equipment NEC
General Industrial Machinery NEC
Automatic Merchandising Machines
Commercial Laundry Equipment
Refrigeration & Air and Heating Equipment
Measuring and Dispensing Pumps
Service Industry Machines, NEC
Carburetors, Pistons, Piston Rings & Valves
Fluid Power Pumps & Motors
Scales & Balances, Except Laboratory
Machinery, Except Electrical NEC
Transformers
Switchgear and Switchboard Apparatus
Motors and Generators
Relays and Industrial Controls
Electric Industrial Apparatus NEC
Electric Lamp Bulbs and Tubes
Small Arms Ammunition
Ammunition, Except for Small Arms
Small Arms
Ordnance and Accessories NEC
Guided Missiles and Space Vehicles
Guided Missile and Space Vehicle Propulsion
Other Space Vehicle and Missile Parts
2.3
-------
Table 2-1. Phase I and Phase n MP&M Sectors and SIC Codes
Number of SIC Groups
Total By Sector 4-Digit Standard Industrial Classification Groups
Sector 7. Mobile Industrial Equipment
93 1 3523 Farm Machinery and Equipment
94 2 3524 Garden Tractors & Lawn & Garden Equipment
95 3 3531 Construction Machinery & Equipment
96 4 3532 Mining Machinery & Equipment, Except Oil Field
97 5 3536 Hoists, Industrial Cranes & Monorails
98 6 3537 Industrial Trucks, Tractors, Trailers
99 7 3795 Tanks and Tank Components
Phase 2
SectorS, Instruments
100 1 3479 Coating, Engraving and Allied Services NEC
101 2 3812 Search, Detection, Navigation, Guidance, Aeronautical, Nautical
102 3 3821 Laboratory Apparatus & Analytical, Optical, Measuring
103 4 3822 Automatic Environmental Controls
104 5 3823 Process Control Instruments
105 6 3824 Fluid Meters and Counting Devices
106 7 3825 Instruments to Measure Electricity
107 8 3826 Laboratory Analytical Instruments
108 9 3827 Optical Instruments & Lenses
109 10 3829 Measuring and Controlling Devices NEC
110 11 3841 Surgical & Medical Instruments & Apparatus
111 12 3842 Orthopedic, Prosthetic & Surgical Supplies
112 13 3843 Dental Equipment and Supplies
113 14 3851 Ophthalmic Goods
114 15 3873 Watches, Clocks, Assoc. Devices & Parts
115 16 3951 Pens, Mechanical Pencils & Parts
116 17 3999 Manufacturing Industries NEC
Sector 9. Precious and Non-Precious Metals
117 1 3911 Jewelry, Precious Metal
118 2 3914 Silverware, Plated Ware & Stainless
119 3 3915 Jewelers' Materials & Lapidary Work
120 4 3931 Musical Instruments
121 5 3944 Games, Toys, Children's Vehicles, Except Dolls & Bike
122 6 3961 Costume Jewelry
Sector 10. Ship
123 1 3731 Ship Building and Repairing
124 2 3732 Boat Building and Repairing
125 3 4493 Marinas
Sector 11. Household Equipment
126 1 2514 Metal Household Furniture
127 2 2515 Mattress, Foundations & Convert. Beds
128 3 2591 Drapery Hardware & Window Blinds, Shades
129 4 3631 Household Cooking Equipment
130 5 3632 Household Refrigerators. & Home & Farm & Freezers
131 6 3633 Household Laundry Equipment
132 7 3634 Electric Housewares and Fans
133 8 3635 Household Vacuum Cleaners
134 9 3639 Household Appliances NEC
135 10 3641 Electric Lamps
136 11 3643 Current-Carrying Wiring Devices
137 12 3644 Noncurrent-Carrying Wiring Devices
141 16 3651 Radio/Television Sets Except Communications. Types
2.4
-------
Table 2-1. Phase I and Phase n MP&M Sectors and SIC Codes
Number of SIC
GrouDS
Total BY Sector 4-Digit Standard Industrial Classification Groups
Sector 12. Railroad
142 1 3743
Sector 13, Motor Vehicle
143 1 3465
144 2 3592
145 3 3647
146 4 3694
147 5 3711
148 6 3714
149 7 3716
150 8 3751
151 9 3792
152 10 3799
Sector 14, Bus & Truck
153 1 3713
154 2 3715
Sector 15, Office Machines
155 1 2522
156 2 2542
157 3 3571
158 4 3572
159 5 3575
160 6 3577
161 7 3578
162 8 3579
163 9 3861
Railcars, Railway Systems
Automotive Stampings
Carburetors, Piston Rings, Valves
Vehicular Lighting Equipment
Electrical Equipment for Motor Vehicles
Motor Vehicle and Automobile Bodies
Motor Vehicle Parts and Accessories
Mobile Homes
Motorcycles
Travel Trailers and Campers
Miscellaneous Transportation Equipment
Truck and Bus Bodies
Truck Trailers
Office Furniture, Except Wood
Office & Store Fixtures, Partitions, Shelving, Lockers
Electronic Computers
Typewriters
Computer Terminals
Computer Peripheral Equipment NEC
Calculating & Accounting Machines Except Electronic Computers
Office Machines, NEC
Photographic Equipment and Supplies
NEC = Not Elsewhere Classified
2.5
-------
Table 2-2 shows that the MP&M industry has generally performed slightly better than the economy as
a whole during the years 1982 through 1991. While real gross domestic product (GDP) grew by 29.0 percent
over the period, real value added by the MP&M industry increased 32.2 percent, although it had reached a peak
in 1989 of $478 billion, 68.7 percent higher than its initial 1982 value. GDP is a measure of value added by
enterprises located within the United States. Real value added among MP&M industries then fell more rapidly
during the end-of-decade recessionary period than did production in the total economy. As a result, the MP&M
industry gave back most of its gain over the aggregate economy.9 Some part of the apparently greater rate of
growth by the other MP&M industries in 1986-87 may also stem from the SIC code redefinition.
Table 2-2. U.S. Gross Domestic Product and MP&M Value Added
Year
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
Real Output, S millions
U.S. GDP
3,758,400.0
3,904,800.0
4,150,700.0
4,278,200.0
4,405,100.0
4,539,900.0
4,716,400.0
4,837,600.0
4,883,700.0
4,847,600.0
MP&MVA
283,117.5
293,210.3
313,262.4
332,231.8
325,998.8
401,479.4
477,088.8
477,515.4
388,810.9
374,151.8
Growth, 1982 to 1991
Growth Rate
U.S. GDP
na
3.9%
6.3%
3.1%
3.0%
3.1%
3.9%
2.6%
1.0%
-0.7%
29.0%
MP&MVA
na
3.6%
6.8%
6.1%
-1.9%
23.2%
18.8%
0.1%
-18.6%
-3.8%
33.2%
Source: Department of Commerce
Labor productivity, measured as value added per hour (VA/hr in Table 2-3) also peaked in 1989 before
dropping sharply as employment declines failed to match declines in output. The discontinuity in 1987 appears
to be an artifact of the 1987 SIC code redefinitions. Excluding 1987, employment declined during every year in
the period of analysis except for 1984 and 1988, ending at 6.7 million employees. Labor productivity fluctuated
widely in recent years but ended 12 percent higher than the 1982 level.
These data exclude Sector 3 Electronic Equipment because of data problems introduced by the 1987 SIC code
redefinitions.
2.6
-------
Table 2-3. Employment and Productivity, All MP&M Sectors
Year
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
Employees,
thousands
5,279.3
5,098.6
5,313.8
5,262.0
5,149.3
7,252.0
7,341.5
7,260.7
7,091.3
6,666.1
Prod. Hrs,
millions
6,861.2
6,850.8
7,473.9
7,253.1
6,913.5
9,420.9
9,649.5
9,533.9
9,242.6
8,666.6
VA/Hr
41.75
43.34
42.50
46.33
47.69
45.26
53.53
54.07
45.58
46.74
Growth, 1982 to 1991
Employees
26.3%
-3.4%
4.2%
-1.0%
-2.1%
40.8%
1.2%
-1.1%
-2.3%
-6.0%
26.3%
Growth Rate
Prod. Hrs
26.3%
-0.2%
9.1%
-3.0%
-4.7%
36.3%
2.4%
-1.2%
-3.1%
-6.2%
26.3%
VA/Hr
12.0%
3.8%
-2.0%
9.0%
2.9%
-5.1%
18.3%
1.0%
-15.7%
2.5%
12.0%
Source: Department of Commerce
MP&M facilities as a whole face substantial foreign competition. Table 2-4 shows that, in aggregate,
MP&M facilities depend on export markets for 20.7 percent of their value of shipments. At the same time, they
face 18.2 percent penetration of the U.S. market by imports10. In 1991, imports exceeded exports by $15.6
billion. Import shares are calculated as the percentage of domestic value of shipments plus imports accounted
for by imports. Export shares are the share of domestic value of shipments accounted for by exports.
Table 2-4 .1989 Import and Export Shares, All MP&M Sectors. Smillions, nominal
Exports
Value of Shipments
Export Share
$210,173.1
$1,015,530.4
20.7%
Imports
Value of U.S. Shipments
Total Market
Import Share of Total
$225,790.3
$1,015,530.4
$1,241,320.7
18.2%
Source: Department of Commerce
Department of Commerce data was used to compute an approximate or "coarse" measure of operating
margin, presented in Table 2-5. The coarse operating margin is defined as the value of shipments less cost of
materials and payroll. Even though nominal shipments rose every year except 1986, coarse margins decreased
continuously after 1984 because of more rapidly rising costs.
10The total U.S. market is presented in this analysis as the sum of the value of shipments and imports.
2.7
-------
Table 2-5.
Year
1982
1983
1984
1985
1986
1987
"Coarse" Operating Margins, All MP&M Sectors. Smillions, 1989 constant
Value of
Shipments
$585,576.9
$620,151.4
$692,426.3
$713,035.2
$708,095.0
$862,838.4
Cost of
Materials
$299,191.5
$320,763.8
$350,721.9
$375,659.8
$377,409.3
$494,727.4
Payroll, all
employees
$130,297.2
$131,663.5
$143,687.9
$148,053.3
$149,612.4
$213,791.0
Coarse Margin
26.7%
27.0%
28.6%
26.6%
25.6%
17.9%
Source: Department of Commerce / Abt Associates Inc.
The creation of new capital in any industry tends to fluctuate more widely over time than changes in
production levels. As seen in Table-2-6, the MP&M industries are no exception. Aggregate new capital
expenditures ranged from a low of $14.9 billion in 1983 to a high of $32.2 billion in 1987. The period of rapidly
increasing capital expenditures between 1983 and 1987 coincided with increasing capacity utilization among
manufacturers as a whole. Recent declines in capacity utilization accompanied a reduction in new capital
expenditures to $24.2 billion in 1991.
Table 2-6.
Year
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
Capacity Utilization and New
Capacity Utilization Index
100.0
102.7
109.6
109.6
108.2
111.0
115.1
115.1
112.3
106.8
Capital Expenditure. Smillions, 1989 constant
New Capital Expenditures
$20,742.6
$14,936.7
$19,473.2
$23,940.1
$23,916.6
$32,158.0
$26,868.0
$30,949.3
$26,399.7
$24,218.0
Source: Department of Commerce
Table 2-7 presents national estimates of baseline financial measures for effluent discharging Phase I
facilities, based on the Survey sample. The measures presented include:
Pre-Tax Return on Assets (PTRA):
Interest Coverage Ratio (ICR):
(R-TC + T + I)/TA
(R - TC + T +1) /1
2.8
-------
R = Total Revenue
TC = Total Cost
T = Tax Expense
I = Interest Expense
TA = Total Assets
Current Ratio (CR):
Debt-to-Total Asset Ratio: (DAR):
Current Assets / Current Liabilities
Total Liabilities / Total Assets
The median values for these financial measures suggest that, in aggregate, MP&M facilities maintained
adequate financial performance and condition during the period 1987-1989. Median values for pre-tax return
on assets, interest coverage ratio, debt-to-asset ratio, and current ratio are all within acceptable margins of
performance for U.S. industries.11 Perhaps the most problematic value revealed in the Survey data is the debt-to-
total asset ratio of 71 percent, averaged across all seven Phase I sectors. This value exceeds levels considered
desirable for U.S. manufacturing industries as recently as a decade ago. However, as a result of increased
corporate financial restructurings, mergers and acquisitions during the 1980s, firms' reliance on debt financing
increased substantially. According to data from the Federal Reserve, the ratio of debt to total assets for non-
financial corporations increased from 32 percent to 45 percent over the 1980s decade. Thus, while the median
of values over MP&M sectors is higher than for U.S. manufacturing industries generally, it is not grossly out of
line, especially given the wide margin of error in the Survey values due to difficulties respondents encountered
in reporting such financial data.
Table 2-7. Financial Performance, MP&M Phase I Sectors
Financial Measure
Pre-Tax Return on Assets
Interest Coverage Ratio
Debt-to- Asset Ratio
Current Ratio
Median
22.0%
30.47
71%
264
Hardware
6.0%
24.60
90%
809
Aircraft
15.0%
30.47
98%
264
Electronic
Equipment
22.0%
15.71
33%
4.78
Stationary
Industrial
Equipment
22.0%
34.35
71%
2.28
Ordnance
31.0%
94.88
73%
1.54
Space
22.0%
43.21
51%
2.00
Mobile
Industrial
Equipment
29.0%
8.76
42%
5.21
Source: Environmental Protection Agency
11 Because of variations among respondents in the way they allocated interest to the facility level in the Survey data gathering
effort, the Interest Coverage Ratio values are probably subject to wider reporting error than other financial measures.
2.9
-------
The distribution of output among facilities of varying sizes differs widely among sectors. The pattern
shown in Table 2-8 for all MP&M sectors collectively corresponds to a distribution that is heavily concentrated
among medium to large establishments. The 0.7 percent of all MP&M establishments that have 500 or more
employees account for almost 60 percent of MP&M shipments in 1987. However, the larger establishments that
dominate total production in these markets nevertheless coexist with a large number of small establishments. The
1987 Census ofManufacturers indicates that the MP&M industry includes 61,746 establishments with fewer
than ten employees. Although they comprise almost half of all MP&M establishments, these very small
establishments account for only 1.8 percent of MP&M shipments and 3.2 percent of employment.
Table 2-8. Distribution of Shipments and Employment, by 1987 Employment Size
Cumulative Percentage
Facility Size, by
Employment
1 to4
5 to 9
10 to 19
20 to 49
50 to 99
100 to 249
250 to 499
500 to 999
1000 to 2499
2500 +
1987 Shipments, Number of 1987 Shipments, Number of
S millions Establishments $ millions Establishments
$5,583.2
$11,155.8
$22,996.6
$54,516.8
$62,284.6
$111,474.2
$104,791.7
$129,823.3
$159,169.7
$260,877.7
39,028
22,718
22,267
21,285
9,701
7,032
2,611
1,184
555
299
0.6%
1.8%
4.3%
10.2%
17.0%
29.0%
40.4%
54;5%
71.7%
100 0%
30.8%
48.7%
66.3%
83.1%
90.8%
96.3%
98.4%
99.3%
99.8%
100 0%
Source: Department of Commerce
Table 2-9 presents some other measures of the MP&M industry in aggregate, as those measures vary
across faculties of varying employment sizes. Measured by value added, output is concentrated among a small
number of large establishments, but small establishments have an important presence because of their great
numbers. Small facilities account for 54.5 percent of employment, 43.4 percent of value added and 36.4 percent
of new capital expenditures. They are generally more labor intensive and less capital intensive than the larger
2.10
-------
establishments. That is, on a per-employee basis, large establishments also produce more, measured by either
value of shipments or value added, than smaller establishments.
Table 2-9. Value Added and New Capital Expenditures
Size, by
Empl., OOOs
Ito4
5 to 9
10 to 19
20 to 49
50 to 99
100 to 249
250 to 499
500 to 999
1000 to 2499
2500 +
Total
Absolute Values
No. of Value Added, New Capital
Emps, OOOs millions Exp., millions
78.7 $3,249.1 $132.5
155.6 $6,493.6 $305.3
306.4 $13,340.3 $660.5
658.4 $30,463.0 $1,446.8
674.7 $33,857.5 $1,586.2
1,109.9 $59,425.7 $3,130.1
961.8 $55,361.2 $3,255.1
967.0 $72,662.9 $3,932.4
1,018.9 $76,969.7 $5,964.4
1,309.6 $114,403.6 $8,477.0
7,241.0 $466,226.6 $28,890.3
Cumulative Percentages
No. of
Employees Value Added
1.1% 0.7%
3.2% 2.1%
7.5% 5.0%
16.6% 11.5%
25.9% 18.7%
41.2% 31.5%
54.5% 43.4%
67.8% 59.0%
81.9% 75.5%
100.0% 100.0%
New Capital
Expenditures
0.5%
1.5%
3.8%
8.8%
14.3%
25.1%
36.4%
50.0%
70.7%
100.0%
Source: Department of Commerce
The conventional measure of horizontal concentration — the concentration ratio — does not address
concentration among the large numbers of smaller manufacturers. Rather, it only compares the largest firms to
the rest of the industry as a whole. The eight-firm concentration ratio among MP&M industries averages 50
percent. The specialization ratio of 83 percent does not stand out as either unusually high or low. It indicates
a moderate degree of diversification and the likelihood of a correspondingly moderate degree of vertical
integration.
While the concentration ratio examines only the largest firms, Table 2-10 examines establishments with
fewer than ten employees12. They account for 48.7 percent of all MP&M establishments, but only 1.8 percent
of shipments and 2.1 percent of value added. In relation to both shipments and value added, these smallest
establishments employ a disproportionately large quantity of labor while generating a disproportionately small
value of new capital expenditures. This table does not show data for small businesses as defined by the Small
Business Administration (SBA), which uses a definition based on firm (company) rather than establishment size.
However, the detailed profiles in the later chapters of this document do present information on SBA-defined
12Since establishments are facilities that may be part of a firm of indeterminate size, characterizations presented in this
section about small establishments are not meant to apply necessarily to small firms, also.
2.11
-------
small businesses by proportionately adjusting the SBA thresholds to reflect average establishment sizes in each
MP&M sector.
Table 2-10. Smallest Facilities (Threshold: 9 employees or fewer)
All Facilities
Smallest Facilities
Smallest Facilities Share
Number of
Facilities
number
126,680
61,746
48.7%
Value of New Capital
Shipments Value Added Employees Expenditures
$ millions $ millions thousands S millions
922,674
16,739
1.8%
466,227
9,743
2.1%
7,241
234
3.2%
28,890
438
1.5%
Source: Department of Commerce
2.12
-------
Chapter 3
Summary Profile of the MP&M Phase I Industry
While Chapter 2 presented economic performance and structure measures aggregated over the fifteen
MP&M sectors, this chapter summarizes and compares information across the seven Phase I sectors. As in the
Chapter 2 profile of the entire MP&M industry, secondary source data pertain to both facilities that discharge
water and those that do not. Only primary source data gathered by the Survey are specific to water discharging
facilities. Table 3-1 shows that Phase I sectors include 10,601 discharging facilities, based on the MP&M
Section 308 survey (the Survey). Of these, 82 percent are indirect dischargers, and 75 percent are small
businesses when compared to an employment threshold based on the Small Business Administration's small
business definition for firms in each MP&M industry. MP&M facilities engage mostly in manufacturing and
derive over 75 percent of their value of shipments from sales to domestic government and non-government
purchasers. Table 3-2 summarizes Survey data for the MP&M Phase I sectors describing the average share of
revenues received by facilities in each sector for each of three types of customers and three types of activities.
In the Survey sample as reported here, exports appear much less important than indicated by the Department of
Commerce data discussed above, in aggregate, and below, by sector. Among the different activities performed
by Survey respondents, manufacturing dominates rebuilding and maintenance in terms of revenue share earned
by each activity. The profile analysis does not use secondary information about sector dependence on the
government, but survey respondents indicate widely ranging dependence on sales to governments.
Table 3-1. MP&M Number of Phase I Dischargers, By Sector. National Estimates.
Sector
1
2
3
4
5
6
7
Hardware
Aircraft
Electronic Eq.
Mobile Ind. Eq.
Stationary Ind. Eq.
Ordnance
Aerospace
All Phase 1
Total
4,197
856
1,280
764
2,769
190
545
10,601
Indirect
3,157
800
1,280
670
2,421
164
213
8,705
Direct
1,040
56
0
94
348
26
332
1,896
Small
3,729
708
577
273
2,207
70
411
7,975
Not Small
468
148
703
491
562
119
134
2,625
Source: Environmental Protection Agency / Data Collection Portfolio
3.1
-------
Table 3-2. Median Revenue Shares by Customer and Activity Type (Percent)
Customer Type
Sector
1. Hardware
2. Aircraft
3. Electronic Eq.
4. Stationary Ind. Eq.
5. Ordnance
6. Space
7. Mobile Ind. Eq.
All (Phase I and II)
Gov't Domestic Exports
6.1
18.3
1.7
8.9
50.6
60.9
1.4
14.8
87.3
21.4
78.1
72.3
37.4
28.6
83.9
60.7
6.6
60.2
20.2
18.8
12.0
10.6
14.7
24.5
Business Activity
Manuf. Rebuild. Maint.
99.8
83.2
94.9
97.2
99.3
98.3
90.0
93.4
0.1
13.5
1.5
1.7
0.4
1.7
0.2
3.8
0.1
3.2
3.7
1.1
0.3
0.0
9.8
2.8
Source: Environmental Protection Agency Data Collection Portfolio
From 1982 to 1991, the nation's real output, measured by gross domestic product (GDP), increased at
an average annual rate of 2.9 percent. Over the same period, the MP&M industries in the 7 Phase I sectors
generally performed less well. Real value added in the seven Phase I sectors grew at an average annual rate of
-0.6 percent or well less than the average annual 2.9 percent growth rate for real GDP.13 hi addition, none of the
MP&M Phase I sectors' production grew faster than GDP between 1982 and 1991 and only 1 sector, Sector 2,
Aircraft, recorded positive growth in output at the rate of 2.01 percent over the period (see Table 3-3). Output
in each of the other MP&M sectors declined at an average annual rate of between 0.20 percent and 2.18 percent.
Table 3-3. Growth in Real Output
,, Average Annual Growth in
F Real Value Added, 1982 -1991
1. Hardware
2. Aircraft
3. Electronic Eq.
4. Stationary Ind. Eq.
5. Ordnance
6. Space
7. Mobile Ind. Eq.
Real GDP
-0.57%
2.01%
-0.20%
-2.18%
-1.04%
-0.26%
-1.98%
2.87%
Source: Department of Commerce
1J This calculation reflects an adjusted estimate of the growth in real value added for MP&M Sector 3, Electronic Equipment
and Sector 4, Stationary Industrial Equipment. Employment and real output time series data for Sector 3 were seriously
distorted by the 1987 redefinition of some SIC codes. Data for Sector 4 are also distorted but to a lesser extent. Pending
development of a more comprehensive adjustment for this distortion, Sector 3 is excluded from some analyses based on the
Census of Manufacturers.
3.2
-------
Only three sectors, Sector 2 Aircraft, Sector 4 Stationary Industrial Equipment14, and Sector 6 Aerospace,
experienced increases in total employment15 over the analysis period (see Table 3-4). While increasing
employment is typically welcomed, the longer term performance of firms and employee earnings depends more
on growth in productivity than on growth in employment. For Sectors 4 and 6, labor productivity16 decreased
even as employment increased. This does not mean that increasing employment caused productivity decline, nor
that it necessarily harmed business performance, but, together with declining output and profitability, it reinforces
the picture of a relative weakening of economic performance in the MP&M industry over the 1980s decade.
Nationwide, both employment and labor productivity grew between 1982 and 1991, at average annual rates of
1.8 percent and 1.1 percent, respectively. Among MP&M Phase I sectors, productivity increased only in the
Aircraft and Ordnance sectors.
Table 3-4. Employment and Productivity Growth Rates
Average Annual Growth Rates, 1982 - 1991
Sector
1. Hardware
2. Aircraft
3. Electronic Eq.
4. Stationary Ind. Eq.
5. Ordnance
6. Space
7. Mobile Ind. Eq.
All Manufacturing
Value Added Per
Employment Production Hour
-0.30%
0.59%
NA
4.65%
-1.41%
2.18%
-2.01%
1.80%
-0.88%
1.26%
NA
-1.29%
1.67%
-0.55%
-1.23%
1.05%
Source: Department of Commerce
Table 3-5 shows the extent to which Phase I sectors depend on foreign markets, measured by import
penetration (import share of domestic value of shipments plus value of imports) and export share of shipments.
The Aerospace sector has negligible imports and exports; it is relatively isolated from foreign markets. While
foreign markets affect the other sectors significantly, none exhibit both relatively high import penetration and
relatively high dependence on export markets. Only Sector 3, Electronic Equipment, faces more import
14 This finding may result from the SIC redefinition in 1986/87.
15 Total employment, as opposed to employment of production workers, includes both production and non-production
employees.
16 Labor productivity in this analysis is defined as value added per production worker hour.
3.3
-------
penetration, at 18 percent, than the national average of 11.7 percent17, but it depends on export customers for a
moderate 18.3 percent of its shipments, compared to a national manufacturing average of 9.5 percent. Only
Sectors 2 and 5 have higher export dependence than the national average, and both of these face low import
penetration. The foregoing notwithstanding, the Electronic Equipment, Aircraft and Ordnance sectors are
relatively sensitive to foreign competition. Only Sector 6, Aerospace, is substantially isolated from foreign
competition. Foreign competition significantly affects the other MP&M sectors.
Table 3-5. Foreign Competition, percent
Sector
1. Hardware
2. Aircraft
3. Electronic Eq.
4. Stationary Ind. Eq.
5. Ordnance
6. Space
7. Mobile Ind. Eq.
All Manufacturing
Penetration
10.6
11.0
18.0
13.2
7.0
0.0
13.7
77.7
Export
Share
8.9
41.4
18.3
21.7
36.3
0.1
31.5
9.5
Source: Department of Commerce
Table 3-6 shows pre-tax returns on assets (PTRA), a measure of the profitability of capital deployed in
an enterprise. Sector 5 Ordnance is the most profitable sector, with a high PTRA of 31 percent, followed closely
by Sector 7 Mobile Industrial Equipment at 29 percent. Only Sector 1 Hardware exhibits a low enough PTRA,
at 6 percent, that it might have difficulty attracting and retaining investors.
17 National average across all manufacturing industries.
3.4
-------
Table 3-6. Financial Performance by Phase I Sector
Pre-Tax Return
Sector on Assets
1. Hardware
2. Aircraft
3. Electronic Eq.
4. Stationary Ind. Eq.
5. Ordnance
6. Space
7. Mobile lad. Eq.
6%
15%
22%
22%
31%
. 22%
29%
Debt-to-Asset
Ratio
0.90
0.98
0.33
0.71
0.73
0.51
0.42
Source: Environmental Protection Agency Data Collection Portfolio
In addition to having the two lowest returns on assets, Sectors 1 Hardware and 2 Aircraft also have the
two highest long-term debt burdens, when measured as the ratio of debt to long-term assets. Their debt-to-asset
ratios are 0.90 and 0.98, respectively. Sectors 4 Stationary Industrial Equipment and 5 Ordnance also have
moderately high debt-to-asset. Sector 3 Electronic Equipment has the lowest debt-to-asset ratio, at 0.33. To
provide a more rigorous analysis of whether sector participation was systematically related to financial
performance in a statistically significant way, several statistical analyses of the Survey data were undertaken.
These analyses, which are documented in Appendix D, examined the relationship between financial performance
and various facility descriptive data including sector participation and facility size. The analyses indicated that
financial performance is not related in any statistically meaningful way to facility sector participation. Thus,
although some sectors may appear to have performed better or worse than others based on the averages of facility
values from the Survey data, the variation in these values across facilities within sectors is so large as to prevent
the apparent differences by sector from being statistically significant.
MP&M firms compete in highly concentrated markets. In spite of numerous small firms and
establishments, the eight largest firms in each 4-digit industry in each MP&M sector produce, on average,
between 32.6 percent and 80.0 percent of their industry's value of shipments. Table 3-7 shows eight-firm
concentration ratios (CRg) and specialization ratios, averaged over each of the seven Phase I sectors. The
Aerospace, Ordnance and Aircraft sectors — sectors 6,5 and 2, respectively — exhibit the highest concentration
ratios, but even the least concentrated sector, Hardware, has a sizable CRg of 32.6 percent, compared to an
aggregate of 12.0 percent for all manufacturing industries.
3.5
-------
Table 3-7. Concentration in MP&M Sectors
Concentration Ratio,
Sector
I. Hardware
2. Aircraft
3. Electronic Eq.
4. Stationary Ind. Eq.
5. Ordnance
6. Space
7. Mobile Ind. Eq.
Manufacturing
8-firm (CR8)
32.6%
77.3%
52.2%
45.5%
81.2%
89.0%
55.9%
12.0%
Specialization
Ratio
91.0%
89.0%
51.0%
84.0%
88.0%
76.0%
75.0%
NA
Source: Department of Commerce
Sector 1, Hardware, is not only the least horizontally concentrated industry, it is also the least likely to
be heavily integrated vertically, since it has the highest specialization ratio. The Aircraft sector also has a high
specialization ratio, which may offset somewhat its high CRg. Horizontal concentration in this sector arises
naturally from large economies of scale; however, aircraft manufacturers have not been able to consolidate
monopolistic market power by integrating with airlines or avionics and engine manufacturers to the extent that
Electronic Equipment manufacturers have integrated with their suppliers and buyers.
3.6
-------
Chapter 4
Analysis of Cost Pass-Through Potential
The profile data and analyses serve the general purpose of providing an understanding of the industry
sectors that will be the subject of regulation. More specifically, however, the data and analyses presented in this
profile aim at understanding the economic response of an industry to the capital and operating cost or savings
accompanying a proposed effluent guideline. Thus, a key result of the profile analyses is the estimation of cost
pass-through capability for MP&M industry sectors and, within sectors, for individual facilities that provide the
basis for the economic impact analysis. This chapter provides an overview of the three major analytical steps
(Appendix B presents a more detailed discussion of this methodology and analytic findings):
1. Estimating structural cost pass-through potential from the structural and performance profiles
of the MP&M sectors. The profile data and analyses summarized above were used to assign
a structural cost pass-through potential to each sector based on the various measures of
economic/financial health and market power, and the associated likely ability to pass through
costs to customers, Specifically, the structural analysis of cost pass-through potential
considered six measures of economic/financial performance and market power that influence
the ability of an industry and its firms to pass through costs to customers. These measures were:
the growth in real value added, the 8-firm concentration ratio, the specialization ratio, the
import penetration percentage, the export share of domestic shipments, and the risk-
normalized pre-tax return on assets. Each of these measures provides information about the
economic health and likely extent of market power that an industry or firms may use in
attempting to pass on the costs of compliance to customers. For each measure, a sector was
assigned a +1, -1, or 0 score depending on whether the value for the sector implies more, less,
or equal structural pass-through potential relative to the median value of the 15 Phase I and
Phase II MP&M sectors (with the exception of the profitability measure, which is based on
Survey data and is thus computed only for Phase I sectors). These values were summed with
possible composite scores ranging between -6 and +6. If the sum was +3 or greater, the sector
was judged to have relatively higher pass-through potential based on the structural analysis and
was assigned a structural score of+1; conversely, a sum of -3 or less means that the sector was
judged to have lower pass-through potential and was assigned a structural score of-1. Sums
4.1
-------
falling between -2 and +2 were assigned the structural score of zero, which implies a neutral
expectation of pass-through potential based on performance and structure considerations. Table
4-1 summarizes the quantitative information from the profile that is used to estimate structural
cost pass-through capability. Table 4-2 summarizes the scoring for each sector based on the
market structure and performance indicators of pass-through potential.18
Table 4-1. Sector Summary of Structural Measures of Cost Pass-Through Capabilities
Sector
All MP&M Median
1. Hardware
2. Aircraft
3. Electronic Eq.
4. Stationary Ind. Eq.
5. Ordnance
6. Space
7. Mobile Ind. Eq.
8. Instruments
9. Precious and Non-
precious Metals
lO.Shipbuilding
11. Household Eq.
12.Railroad
IS.Motor Vehicle
14.Bus and Truck
1 5. Office Machine
Concentration
Ratio, 8-firin
57.7
32.6
77.3
52.2
45.5
81.2
89.0
55.9
47.4
49.5
49.5
57.7
71.0
68.6
43.0
61.6
Specialization
Ratio
84.0
91.0
89
51.0
84.0
88.0
76.0
75.0
80.0
94.0
99.0
84.0
88.0
94.0
96.0
54.0
% Import
Penetration
13.2
10.6
11
18.0
13.2
7.0
0.0
13.7
10.9
56.0
56.0
29.6
11.1
24.9
2.5
27.3
% Export
Share
75.5
8.9
41.4
18.3
21.7
36.3
0.1
31.5
15.5
38.3
38.3
18.3
11.4
15.8
5.3
36.1
% Growth
Rate,VA
-0.6
-0.6
2.0
-0.2
-2.2
-1.0
-0.3
-2.0
na
na
na
na
na
na
na
na
Pre-Tax Return
on Assets
22.0%
6.0%
11.7%
22.0%
22.0%
31.0%
22.0%
29.0%
na
na
na
na
na
na
na
na
Source: Environmental Protection Agency., Department of Commerce
18 For all measures except profitability, this analysis was completed using both the seven Phase I and eight Phase II
sectors. The ranking of sector values, identification of median scores, and designation of whether a sector scores above
or below the median is based on the full fifteen MP&M sectors. Because profitability was estimated from Survey data,
the calculation of, and comparison with, a median is only for the seven Phase I sectors.
4.2
-------
Table 4-2. Summary of Structural Analysis of Cost Pass-Through Potential
Cone, Spec. Import Export
Sector Ratio Ratio Penetration Dependence Growth Profit
1. Hardware
2. Aircraft
3. Electronic Eq.
4. Stationary Ind. Eq.
5. Ordnance
6. Aerospace
7. Mobile Ind. Eq.
-1
-1
-1
-1
+1
0
-1
-1
-1
+1
0
-1
+1
+1
+1
+1
-1
0
+1
+1
-1
+1
-1
0
-1
-1
+1
-1
0
+1
+1
-1
-1
+1
-1
-1
-1
0
0
+1
0
+1
Raw
Score
-1
-2
1
-2
0
4
-2
Source: Abt Associates Inc.
2. Estimating the historical relationship between input costs and output prices for the MP&M
industries and assigning a cost pass-through score based on historical cost and pricing
performance by sector. Econometric analyses of input costs and output prices were performed
to estimate historical cost pass-through elasticities for each of the 15 Phase I and Phase II
MP&M sectors. These elasticities indicate the change in output prices by sector that have
occurred historically in relation to changes in the cost of production inputs. The estimation of
these elasticities used price indexes from the Bureau of Labor Statistics and input coefficients
from the Bureau of Economic Analysis National Input-Output tables to calculate a composite
input cost index over a 15-year period for each MP&M sector. In addition, a composite output
price index was also developed for each sector. A log-linear regression of sector output price
as a function of composite input cost yielded historical cost pass-through elasticities for each
sector. The estimated values by sector ranged from 0.77 to 0.97 and were highly significant
from a statistical standpoint (See Table 4-3). Each sector was assigned a score of+1, -1, or 0,
depending on whether its estimated elasticity value was among the highest, lowest or middle five
of the estimated elasticity values. The estimated elasticity values serve two functions in the
pass-through analysis: (1) they supplement the information from the structural analysis on the
likely pass-through performance of the individual MP&M sectors; and (2) they provide a
numerical calibration of pass-through capability based on actual input cost and output price
changes in the sectors.
4.3
-------
Table 4-3. Estimated Elasticity Values and Assigned Elasticity Score for MP&M
Phase I and Phase H Sectors
Sector
Estimated
Elasticity
Rank
Elasticity
Score
Phase I Sectors
1.
2.
3.
4.
5.
6.
7.
Hardware
Aircraft
Electronic Equipment
Stationary Industrial Equipment
Ordnance
Aerospace
Mobile Industrial Equipment
0.889
0.924
0.899
0.909
0.907
0.773
0.901
14
4
12
9
10
15
11
-1
1
-1
0
0
-1
-1
Phase II Sectors
8.
9.
10.
11.
12.
13.
14.
15.
Instruments
Precious and Non precious Metals
Shipbuilding
Household Equipment
Railroad
Motor Vehicle
Bus and Truck
Office Machine
0.923
0.938
0.970
0.921
0.911
0.898
0.930
0.920
5
2
1
6
8
13
3
7
1
1
1
0
0
-1
1
0
Source: Abt Associates Inc.
3.
Combining the structural and performance profile data from Step 1 with the econometric
estimates from Step 2 to assign ranges of cost pass-through coefficients to each MP&M sector
and, with use of certain facility-specific data, to each facility in the economic impact analysis.
The blending of the structural measures of pass-through potential and the econometrically
estimated pass-through elasticities yielded predicted cost pass-through coefficients that will
determine how much of the engineering cost of compliance each MP&M sector and facility
would likely be able to pass on to customers. Specifically, the scores from the preceding two
procedures were summed to yield a composite score, which could take on values from -2 to +2.
In addition, the estimated elasticity values from Step 2 were divided into three ranges — low,
medium andhigh—with average elasticity values of 0.87,0.91, and 0.94, respectively. These
elasticity values measure the percentage change in selling price per percentage change in input
costs. The elasticity values and the ranges about them are summarized in the Table 4-4, below.
4.4
-------
Table 4-4, Estimated Compliance Cost Pass-Through Elasticities
Elasticity Range
Low Pass-Through Capability
Medium Pass-Through Capability
High Pass-Through Capability
Minimum
Value
0.773
0.907
0.923
Average
Value
0.872
0.914
0.937
Maximum
Value
0.901
0.921
0.970
Source: Abt Associates Inc.
Sectors with a positive composite score were assigned to the high elasticity value range; sectors with
a score of 0 were assigned to the medium elasticity range; and sectors with a negative score were assigned to the
low elasticity range. These estimated elasticity values by sector were further refined for the facility impact
analysis to take account of differences in facility financial performance. Table 4-5 summarizes the assignment
of Phase I sectors to the elasticity ranges.
Table 4-5. Assignment of MP&M Phase I Sectors to Elasticity Ranges
Sector
1.
2.
3.
4.
5.
6.
7.
Hardware
Aircraft
Electronic Equipment
Stationary Industrial Equipment
Ordnance
Aerospace
Mobile Industrial Equipment
Structural
Score
0
0
0
0
0
-1
0
Elasticity
Score
-1
1
-1
0
0
-1
-1
Composite
Score
-1
1
-1
0
0
0
-1
Elasticity
Range
Low
High
Low
Middle
Middle
Middle
Low
Source: Abt Associates Inc.
Finally, the assigned elasticities were adjusted to take into account the proportion of establishments in
each MP&M sector that are not expected to be subject to effluent guideline compliance. This proportion, named
the regulatory coverage ratio in this methodology, was defined for each MP&M sector as the ratio of effluent
discharging facility revenues within each sector, as estimated from Survey responses, to total value of shipments
in that sector, as reported by the Department of Commerce. Non-dischargers impose a similar kind of price
discipline to that imposed by foreign competitors, to the extent that foreign producers do not have to meet the
same effluent standards. In a sector where dischargers comprise only a small portion of the total market, non-
dischargers would be able to take customers away from complying facilities that try to pass on compliance costs
through price increases. Non-dischargers, not incurring effluent guideline compliance costs, would be able to hold
their prices constant and undercut dischargers.
4.5
-------
The magnitude of this price discipline effect is difficult to predict. However, one would expect the
relationship between cost pass-through ability and regulatory coverage ratio to exhibit certain characteristics.
First, if a sector's regulatory coverage ratio is 100 percent, then the assigned cost pass-through coefficient should
not be diminished at all, since there are no unregulated producers to impose price discipline. Second, as the
regulatory coverage ratio approaches zero, the assigned cost pass-through coefficient should also approach zero.
In the limiting case, where dischargers comprise only an infinitesimal portion of the industry, these facilities
would have no more ability to move their product prices than atomistic firms in pure competition. In between
the two extremes, the diminution of the assigned cost pass-through coefficient should monotonically increase as
the regulatory coverage ratio decreases.
In the absence of any other reliable information, this cost pass-through analysis diminishes the cost pass-
through coefficients assigned by Table 5.5 in proportion to each sector's regulatory coverage ratio. Only in two
sectors were the estimated revenues from dischargers less than total MP&M value of shipments.19 Hardware
revenues among dischargers amounted to 34.8 percent of all value of shipments in the sector, while the Stationary
Industrial Equipment sector had a regulatory coverage ratio of 39.7 percent.
These elasticity values, adjusted for regulatory coverage, describe the expected percent change in output
price associated with a percent change in input costs. To interpret these pass-through elasticity values in terms
of the percentage of compliance costs that would be passed on to customers as higher output prices (pass-through
coefficient) requires additional information on the pre-compliance revenue and cost structure of Survey facilities
(see Appendix B). For the profile analysis, these pass-through coefficients — that is, the fraction of compliance
costs passed on as higher output prices — were calculated for each sector based on the average margin for
facilities by sector and using the minimum, average, and maximum elasticity values for the range to which the
sector is assigned. Table 4-6 summarizes the average cost pass-through coefficients by sector as computed from
the minimum, average, and maximum elasticity values for the applicable elasticity range. Because, in this impact
analysis, the quantity response to cost and price increases was captured by facility closures, while keeping
production constant in remaining facilities, these fractions of compliance costs that are recovered through higher
prices are also the changes in total revenues as a fraction of total compliance costs.
19 Because of the small size of the Survey sample, measures such as facility revenue were subject to large uncertainty.
4.6
-------
Table 4-6. Fraction of Compliance Cost Expected to be Passed Through to Customers by Sector
Sector
1. Hardware
2. Aircraft
3. Electronic Equipment
4. Stationary Industrial Eq.
5. Ordnance
6. Aerospace
7. Mobile Industrial Eq.
Elasticity
Range
Low
High
Low
Low
Middle
Middle
Low
Minimum
Elasticity Value
0.284
0.949
0.849
0.325
0.950
0.955
0.786
0.875
Based on
Average
Elasticity Value
0.321
0.964
0.958
0.366
0.956
0.962
0.886
0.938
Maximum
Elasticity Value
0.331
0.997
0.990
0.378
0.964
0.970
0.916
0.963
To put this cost pass-through analysis in context, the estimated cost pass-through coefficients translate
the compliance costs estimated by the engineering analyses into dollar values of the impact of proposed effluent
guidelines on each facility analyzed. For example, if the engineering analysis indicates that a particular facility
subject to a particular set of guidelines will incur annualized costs of $1,000 to meet those guidelines, the cost
pass-through coefficient multiplied by $1,000 will be the estimated increase in annual revenue from price
increases. The difference is the actual compliance cost burden to that facility.
4.7
-------
-------
Chapter 5
MP&M Sector Profiles
5.0 Introduction
The following sections present the profile data and analyses for each of the seven Metal Products and
Machinery Industry Phase I Sectors:
5.1. Hardware
5.2. Aircraft
5.3. Electronic Equipment
5.4. Stationary Industrial Equipment
5.5. Ordnance
5.6. Aerospace
5.7. Mobile Industrial Equipment.
Each discussion includes the following parts:
I. Sector Definition in which the 3- and 4-digit SIC groups comprising the sector are summarized;
II. Domestic Production Profile for the sector, which summarizes the production and employment
history in the sector;
III. Effluent Discharging Facilities, an examination of some of the characteristics of dischargers
in the relevant MP&M sector, based on sample weighted Survey responses.
VI. International Competitive Structure of the industry, which reviews the character of
international competition in the sector considering both import penetration to domestic markets
and domestic producers' reliance on export markets;
5.1
-------
V. Financial Condition and Performance, which summarizes financial measures for the sector
based on Survey and secondary source data;
VI. Industry Structure and Competition, which reviews the likely extent of market power among
larger firms in the sector based on the measures of horizontal and vertical integration, and the
role of smaller firms in the sector; and
VII. Structurally Derived Cost Pass-Through Ability, which summarizes the findings from the
review of industry structural characteristics regarding the likely ability of firms in the sector to
be able to pass on to customers the costs of complying with an effluent guideline.
5.2
-------
5.1 MP&M Sector 1: Hardware
5.1.1 Definition of Sector
The Hardware sector includes the following 4-digit SIC industries:
SIC Industry
279 Service Industries for the Printing Trade
2796 Platemaking and Related Services
339 Miscellaneous Primary Metal Products
3398 Metal Heat Treating
341 Metal Cans and Shipping Containers
3412 Metal Shipping Barrels, Drums, Kegs, and Pails
342 Cutlery, Handtools, and General Hardware
3421 Cutlery
3423 Hand and Edge Tools, Except Machine Tools and Handsaws
3425 Saw Blades and Handsaws
3429 Hardware, NEC
343 Heating Equipment, Except Electric and Warm Air; And Plumbing Fixtures
3433 Heating Equipment, Except Electric and Warm Air Furnaces
344 Fabricated Structural Metal Products
3441 Fabricated Structural Metal
3442 Metal Doors, Sash, Frames, Molding, and Trim
3443 Fabricated Plate Work (Boiler Shops)
3444 Sheet Metal Work
3446 Architectural and Ornamental Metal Work
3448 Prefabricated Metal Buildings and Components
3449 Miscellaneous Structural Metal Work
5.3
-------
345 Screw Machine Products, and Bolts, Nuts, Screws, Rivets, and Washers
3451 Screw Machine Products
3452 Bolts, Nuts, Screws, Rivets, and Washers
346 Metal Forgings and Stampings
3462 Iron and Steel Forgings
3466 Crowns and Closures
3469 Metal Stampings, NEC
349 Miscellaneous Fabricated Metal Products
3492 Fluid Power Valves and Hose Fittings
3493 Steel Springs, Except Wire
3494 Valves and Pipe fittings, NEC
3495 Wire Springs
3496 Miscellaneous Fabricated Wire Products
3498 Fabricated Pipe and Pipe Fittings
3499 Fabricated Metal Products, NEC
354 MetalworkingMachinery and Equipment
3541 Machine Tools, Metal Cutting Types
3542 Machine Tools, Metal Forming Types
3544 Special Dies and Tools, Die Sets, Jigs and Fixtures, and Industrial Molds
3545 Cutting Tools, Machine Tool Accessories, and Machinists' Precision Measuring Devices
3546 Power-Driven Handtools
396 Costume Jewelry, Costume Novelties, Buttons, and Miscellaneous Notion, Except Precious
Metals
3965 Fasteners, Buttons, Needles, and Pins
5.4
-------
5.1.2 Domestic Production Profile
Production in the Hardware sector closely follows the level of construction and manufacturing activity
in the economy. Thus the sector has shown a relatively smooth, pro-cyclical pattern of output over the past
decade. However, the sector is also facing a long-term downward trend in demand due to cost-cutting by its client
industries.
Numerous small and mid-sized firms account for most of the sector's production. Many of these cater
to specialized markets and enter and exit relatively frequently in response to both general business conditions and
changes in niche markets. Demand for Hardware sector output will be discussed more later in this section.
Although the value of shipments and value added in the hardware sector increased by 37.4 percent and
41.0 percent, respectively, from 1982 to 1991, prices rose even more. In constant dollars, therefore, real value
of shipments declined 7.6 percent and real value added declined 5.2 percent. On an average annual basis, the
annual rate of decline in real value
added is 0.6 percent, the median among
MP&M sectors. Thus, this sector
neither gains nor loses in its expected
cost pass-through potential based on the
sector's growth in output over the period
of analysis. Table 5.1-1 shows that for
most of this period, real output was
higher than the 1982 level, but then
output fell sharply during the
recessionary period of 1990-1991. Real
value of shipments was $110.8 billion in
1982, while real value added was $57.2
billion in the same year. Real value added declined 23.4 percent between 1989 and 1991. The only other declines
during the period of analysis were a 2.7 percent loss in 1983 and a 1.4 percent loss in 1986.. At its peak, real
value added reached $70.8 billion in 1989, representing a 23.7 percent gain over the 1982 level.
N
$140,000
g $120,000
£ $100,000
.§ $80,000
o\
00
c\
*"* $60,000
$40,000
Real Output
IP&M Sector 1: Hardware
Value of
Shipments
L
^
*- .0
s
Value Added
f^~
1982
1984
*~ .
^ -.
A
^
^
,
\
\
i
\
>^
^^
i
1986 1988 1930
5.5
-------
Table 5.1-1. Output and Growth
Year
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
Year
1982-91
1983
1984
1985
1986
1987
1988
1989
1990
1991
S millions, current
Value of Value
Shipments Added
93,642.5 48,385.3
91,536.8 48,055.6
101,442.3 53,412.4
104,409.2 55,284.3
104,069.7 54,814.2
108,189.8 57,669.9
124,488.8 66,854.2
132,152.7 70,827.5
130,455.5 70,750.6
128,627.5 68,208.4
Growth Rate, current
Value of Value
Shipments Added
37.4% 41.0%
-2.2% -0.7%
10.8% 11.1%
2.9% 3.5%
-0.3% -0.9%
4.0% 5.2%
15.1% 15.9%
6.2% 5.9%
-1.3% -0.1%
-1.4% -3.6%
S millions. 1989
Value of
Shipments
110,792.2
106,155.7
115,375.9
117,711.9
116,754.9
119,515.0
130,190.1
132,152.7
107,384.8
102,385.2
Growth Rate. $
Value of
Shipments
-7.6%
-4.2%
8.7%
2.0%
-0.8%
2.4%
8.9%
1.5%
-18.7%
-4.7%
constant
Value
Added
57,248.6
55,695.6
60,772.8
62,285.0
61,437.9
63,705.1
69,952.7
70,827.5
57,949.5
54J251.9
constant
Value
Added
-5.2%
-2.7%
9.1%
2.5%
-1.4%
3.7%
9.8%
1.3%
-18.2%
-6.4%
Source: Department of Commerce
Labor productivity, measured as value-added per production hour, also grew during the 1982-1989
period, followed by a sharp decline in 1990 and 1991. In fact, Table 5.1-2 shows that productivity was higher
than the 1982 initial value in each year until 1990, when it fell 17.2 percent, followed by a 0.8 percent decline
in 1991. The only other year in which productivity decreased was in 1987, when productivity dropped 6.0
percent, in conjunction with a 10.3 percent increase in production worker hours.
5.6
-------
Table 5.1-2. Employment and Productivity
Year
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
AU Employees,
thousands
1,279.3
1,211.0
1,255.8
1,239.0
1,187.0
1,295.2
1,320.4
1,329.1
1,315.7
1,244.3
Production
Hours, millions
1,797.0
1,738.8
1,858.4
1,822.6
1,733.4
1,911.4
1,984.2
1,988.8
1,966.3
1,855.6
Real Value
Added/Hour
31.9
32.0
32.7
34.2
35.4
33.3
35.3
35.6
29.5
29.2
Growth Rate
Year
1982-91
1983
1984
1985
1986
1987
1988
1989
1990
1991
All Employees
-2.7%
-5.3%
3.7%
-1.3%
-4.2%
9.1%
1.9%
0.7%
-1.0%
-5.4%
Production
Hours
3.3%
-3.2%
6.9%
-1.9%
-4.9%
10.3%
3.8%
0.2%
-1.1%
-5.6%
Real Value
Added/Hour
-8.2%
0.5%
2.1%
4.5%
3.7%
-6.0%
5.8%
1.0%
-17.2%
-0.8%
Source: Department ofCommerce
Over the entire period, production hours increased 3.3 percent, although the number of production and
non-production employees declined by 35,000. Since real output declined while production hours increased,
productivity declined 8.2 percent. The Hardware sector appears to be experiencing some of the structural changes
confronting U.S. manufacturers in general.
5.1.3 Effluent Discharging Facilities
The Hardware sector includes an estimated 4,197 effluent dischargers, accounting for almost 40 percent
of MP&M facilities that discharge water and earning an average of $44.3 billion in annual revenue during the
period of 1987 to 1989, in 1989 constant dollars (see Table 5.1-3). These hardware facilities, however, account
for only 12.5 percent of employment and 9 percent of revenues from Phase I MP&M dischargers, implying that
hardware facilities are relatively small, compared to facilities in other sectors. This is true of non-discharging
facilities in this sector, also.
5.7
-------
Within the Hardware sector, dischargers earn an estimated 34.8 percent of all revenues earned in the
sector. Due to the small sample size, this value, called the regulatory coverage ratio, is subject to substantial
uncertainty. However, the cost pass-through elasticities are multiplied by the regulatory coverage ratio to account
for the best estimate of cost pass-through attenuation due to the size of sector's market that is not subject to
regulation.
Facilities in small businesses, as defined later in this chapter, comprise 89 percent of all facilities in the
Hardware sector and employ 64 percent of production and non-production employees within the sector.
In the Hardware sector, 96 percent of revenues earned by facilities are in fact earned from sales in
Hardware sector industries. Nearly all revenues reported by responding facilities in the Hardware sector come
from manufacturing activities, with less than 0.2 percent derived from repairing and maintenance.
Table 5.1-3. National Estimates of Effluent Dischargers in the Hardware Sector
#
All Hardware
Small Business Owned Facilities
Not Small
Indirect Dischargers
Direct Dischargers
of Facilities % of Total Employment % of Total
4,197
3,729
468
3,157
1,040
100%
89%
11%
75%
25%
378,942
243,433
135,509
351,315
27,627
100%
64%
36%
92%
8%
Source: Environmental Protection Agency
5.1.4 International Competitive Structure
Foreign trade in the Hardware sector has been helped in recent years by favorable exchange rates but
hindered by recessions abroad. Of the $128.6 billion worth of shipments by the Hardware sector, $11.5 billion,
or 8.9 percent, were sold to foreign customers in 1991 (See Table 5.1-4). Imports amounted to $15.2 billion, or
10.6 percent of both imported and domestic shipments, yielding a trade deficit of $3.7 billion. Hardware
manufacturers participate less in foreign trade than the MP&M industries in general, which exhibit a median
export share of 18.3 percent and import penetration of 13.2 percent. Both measures of international competition
suggest that the Hardware sector may be better off than other MP&M sectors in its ability to pass on increased
costs of compliance to customers.
5.8
-------
Table 5.1-4. 1991 Import and Export Shares, $ millions
Exports
Value of Shipments
Export Share
$11,475.7
$128,627.5
8.9%
Imports
Value of U.S. Shipments
Total Market
Import Share of Total
$15,176.5
$128,627.5
0.1%
Source: Department of Commerce
Survey responses confirm this observation. The estimated share of revenues derived by MP&M
dischargers from exports is under 6 percent. This is the lowest reported dependence on export revenues among
the seven Phase I sectors.
The North American Free Trade Agreement is expected to benefit the Hardware sector very significantly.
Canada and Mexico are the sector's most important customers, and industry observers expect U.S. exports, in
particular, to gain from reduced regulatory barriers.
Recent relocation of foreign-owned manufacturers from overseas sites to the United States has also
helped generate domestic demand for Hardware sector output. Foreign investment in automobile manufacturing
in the U.S., for instance, has relocated derived demand for items such as machine tools from overseas markets
to U.S. markets. At the same time, though, increasing numbers of U.S. manufacturers are establishing European
subsidiaries in anticipation of trade barriers in the form of standard setting in a unified European Community.
Hardware sector manufacturers are typically small. They find it relatively difficult and risky to incur the
initial costs of mounting an export-marketing campaign on their own. Exports in this sector also respond to
research and development funding levels because U.S. Hardware sector manufacturers have enjoyed relatively
greater successes in exporting high technology, high value added products.
5.1.5 Financial Condition and Performance
Operating margins, shown in Table 5.1-5, were calculated from the 1987 Census ofManufacturers by
subtracting the cost of materials and total payroll from the value of shipments. This data was available from
1982 to 1987, during which time margins decreased from 27.3 percent in 1982 to 26.2 percent two years later,
recovered almost completely the following year, and then fell sharply to 22.5 percent in 1987. This measure of
margin is rather coarse and should be used primarily to examine the time-path of production costs and gross
margins within an industry and should not be used for cross-industry comparisons of financial performance.
5.9
-------
Table 5.1-5. Operating Margins, S millions
Year
1982
1983
1984
1985
1986
1987
Value of
Shipments
1 10,792.2
106,155.7
1 15,375.9
117,711.9
116,754.9
119,515.0
Cost of
Materials
51,822.7
50,199.0
55,438.0
55,744.7
54,929.5
59,120.1
Payroll, all Operating
employees Margin
28,721.8
27,671.1
29,702.7
30,402.1
30,091.7
33 519 9
27.3%
26.6%
26.2%
26.8%
27.2%
22 5%
Source: Department of Commerce
The capacity utilization index shown on Table 5.1-6 represents the entire manufacturing sector; it is
scaled so that 100 represents the value of the index in 1982. Except for a 1.8 percent decline in 1986,
manufacturing capacity utilization rose from 1982 to high in 1988 of 15 percent over the 1982 level. It then
declined in 1990 and 1991 for a net increase of 7 percent over the entire period.
Table 5.1-6. Capacity Utilization and Capital Expenditures
Year
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
Capacity New Ca
Utilization Index (mil
100
103
110
110
108
111
115
115
112
107
pital Expenditures
lions)
$3,309.1
$2,565.1
$3,521.0
$3,609.5
$3,168.5
$3,592.5
$3,003.1
$3,617.4
$3,080.5
$2 594 9
New capital expenditures fluctuated between a high of over $3.6 billion in 1989 and a low of $2.6 billion
in 1983, which was nearly matched by the 1991 value. This pattern is consistent with pervasive uncertainty
among hardware manufacturers about the strength of the recovery early in the period of analysis, followed by a
collapse in expectations since 1989.
Table 5.1-7 shows that, based on Survey data, the Hardware sector's financial condition and performance
compared unfavorably to other MP&M Phase I sectors, except for its current ratio of 8.09, which is the highest
5.10
-------
among Phase I sectors. Its pre-tax return on assets, a measure of profitability, was 6 percent, the lowest among
the seven Phase I sectors, while the interest coverage ratio, at 24.6, was worse than the median value of 30.47.
hi addition, the debt-to-asset ratio, 0.90, is also worse (higher) than the median value. On the basis of its low
profit performance as measured by PTRA, the Hardware sector would be expected to achieve relatively low
performance among MP&M Phase I sectors in its ability to pass on costs to customers.
Table 5.1-7. Financial Performance
Financial Measure
Pre-Tax Return on Assets
Interest Coverage Ratio
Debt-to- Asset Ratio
Current Ratio
Sector
Value
6.00%
24.60
90%
8.09
Phase I
Median
22.00%
30.47
71%
2.64
Phase I
Rank
7
5
6
1
Source: Environmental Protection Agency
5.1.6 Industry Structure and Competitiveness
Of 40,936' establishments in the hardware
sector, 65 percent have fewer than 20 employees.
Table 5.1-8 shows the value of shipments accounted
for by establishments of various size categories.
Most hardware shipments come from
establishments of intermediate size; establishments
with between 20 and 499 employees account for
three-fifths of both value added and employment,
although they make up less than a third of all
establishments in the sector. The Small Business
Distribution of Shipments by Size
MP&M Sector 1: Hardware
g $30,000
"§ $25,000
H $20.000
I.
3 $15,000
° $10,000
J
•J $5,000
S $0
1 to 4 20 to 49 250 to 499
Establishment Size, # of Employees
1987 Census of Manufacturers, Department of Commerce
5.11
-------
Administration's small business threshold averages 504 employees at the firm level2.
Table 5.1-8. Distribution of Shipments
Size, by
Emploment
Ito4
5 to 9
10 to 19
20 to 49
50 to 99
100 to 249
250 to 499
500 to 999
1000 to 2499
2500 +
Shipments,
millions, 1987
1,582.1
3,673.1
8,480.0
20,739.4
21,481.3
28,549.0
19,838.7
9,086.7
3,544.0
0.0
Number of
Establishments
10,739
7,778
8,274
8,113
3,409
1,933
517
135
35
3
Cumulative Percentages in Sector
Shipments,
millions, 1987
1.4%
4.5%
11.7%
29.5%
47.8%
72.2%
89.2%
97.0%
100.0%
1000%
Number of
Establishments
26.2%
45.2%
65.4%
85.3%
93.6%
98.3%
99.6%
99.9%
100.0%
1000%
Source: Department of Commerce
The same distribution pattern applies to value added and new capital expenditures (see Table 5.1-9).
Larger establishments expend slightly more on new capital than smaller ones, per employee. While the median
size is between 50 and 99 employees, more workers are employed by establishments with between 100 and 249
employees than by establishments in any other size cohort. This cohort accounts for approximately 23 percent
of value added, new capital expenditures and employment.
2The Small Business Administration defines a small business as a firm with fewer than 504 employees, where this
threshold is a calculated as a shipments-weighted average of small business thresholds for each 4-digit industry in Sector
1, Hardware. The SBA threshold is given in terms of firm-level employment, though, and is therefore not directly
comparable to facility employment values given here.
5.12
-------
Table 5.1-9. Value Added and New Capital Expenditures by Employee Size, $ millions
Size, by
Employment
1 to 4
5 to 9
10 to 19
20 to 49
50 to 99
100 to 249
250 to 499
500 to 999
1000 to 2499
2500 +
All Sizes
Number of
Employees, OOOs
22.3
52.6
114.5
250.1
234.9
292.2
196.5
98.8
33
0
1294.9
Value Added,
millions
$899.5
$2,140.6
$4,950.7
$11,370.3
$11,443.1
$14,734.2
$10,630.2
$5,195.3
$1,919.9
$0.0
$63,283.8
New Capital
Exp., millions
$34.0
$107.0
$243.0
$557.8
$555.2
$749.8
$578.5
$327.8
$117.0
$0.0
55,270.7
Number of
Establishments
10,739
7,778
8,274
8,113
3,409
1,933
517
135
35
3
40,936
Cumulative Percentages in Sector
Size, by
Employment
Ito4
5 to 9
10 to 19
20 to 49
50 to 99
100 to 249
250 to 499
500 to 999
1000 to 2499
2500 +
Number of
Employees
1.7%
5.8%
14.6%
33.9%
52.1%
74.6%
89.8%
97.5%
100.0%
100.0%
Value Added
1.4%
4.8%
12.6%
30.6%
48.7%
72.0%
88.8%
97.0%
100.0%
100.0%
New Capital
Expenditures
1.0%
4.3%
11.7%
28.8%
45.8%
68.7%
86.4%
96.4%
100.0%
100.0%
Number of
Establishments
26.2%
45.2%
65.4%
85.3%
93.6%
98.3%
99.6%
99.9%
100.0%
100.0%
Source: Department of Commerce
The eight largest firms in each Hardware sector industry produce an average of 32.6 percent of that
industry's output, compared to the MP&M median eight-firm concentration ratio of 55.9. The sector has
moderate diversity of production activities; its specialization ratio of 91 percent is greater than the median of 88
percent for all MP&M sectors: 9 percent of the output of establishments in the hardware sector falls into an SIC
category other than the establishment's primary SIC industry. The relatively high specialization ratio and
relatively low horizontal concentration ratio suggest less than average expected potential among MP&M sectors
to pass on costs of compliance to customers.
On the other end of the size scale, the smallest establishments generate less than a proportionate share
of output, employment and new capital expenditures. Table 5.1-10 examines establishments with fewer than 9
5.13
-------
employees. These establishments comprise 5.8 percent of all hardware employment and establishments, but they
generate only 4.5 percent of shipments and 4.3 percent of new capital expenditures in this sector.
Table 5.1-10. Smallest Businesses
All Sector Smallest Businesses* Smallest Business Share
Number of Facilities
Shipments, $ millions
Value Added, $ millions
Employees, thousands
New Capital Expenditures, $ millions
40,936.0
116,974.3
63,283.8
1,294.9
3,270.1
18,517.0
5,255.2
3,040.1
74.9
141 0
45.2%
4.5%
4.8%
5.8%
4 3%
fewer than JO employees.
Source: Department of Commerce
The major sources of demand include automobile and aerospace manufacturing and construction
industries. All of these sectors are sensitive to the availability of financing and to environmental regulations.
Increasingcosts of environmental compliance abroad, for instance, will benefit U.S. hardware manufacturers.
Survey respondents indicated that domestic non-government sales account for approximately 87 percent
of their revenues. Export sales total another 6.6 percent, hi third place, an estimated 6.1 percent of revenues
come from sales to government purchasers. Cutbacks in defense spending will decrease aerospace, construction
and manufacturing activity in general, with particular detriment to specialized Hardware manufacturers.
Nevertheless, the continuing and perhaps increasing flow of infrastructure spending by the government is an
important source of demand for Hardware sector production.
Even though consumers of hardware commodities seem numerous and competitive, the large number of
very small establishments in the Hardware sector means that these establishments sometimes face oligopsonistic
markets within specific industries or niches. Industry observers describe some fastener manufacturers in this way,
for instance, implying that they would have very little ability to pass through cost shocks. Some valve and pipe
fitting manufacturers cater to the oil and gas industry, which can wield significant market power as large
customers of numerous, small suppliers.
5.1.7 Structurally Derived Cost Pass-Through Ability
The Hardware sector is less integrated than most MP&M sectors, as indicated on Table 1-11. This
sector's concentration ratio is less than the median while its specialization is higher than the median, and these
values yield scores of-1 point each. The market structure characteristics are offset by the hardware sector's
5.14
-------
relative insulation from foreign competition: the sector's penetration by imports and dependence on exports are
both below the median for MP&M sectors, giving scores of+1 each. Since the average growth rate in real value
added equals the MP&M sector median, it does not contribute to breaking the tie between domestic and
international market structure considerations. However, the Hardware sector's low PTRA of 6 percent contributes
a score of -1, which is also the composite score. On the basis of market structure and economic performance
considerations, the sector would be expected to perform below average among MP&M sectors in its ability to
pass on the costs of effluent guideline compliance to its customers.
Table 1-11. Structural Measures of Cost Pass-Through Capability
Sector Value MP&M Median Points
Concentration Ratio, 8-firm
Specialization Ratio
Import Penetration, %
Export Share, %
Growth Rate, %
Pre-Tax Return on Assets, %
32.6
91.0
10.6
8.9
-0.6
6.0
57.7
84.0
13.2
18.3
-0.6
22
-1
-1
1
1
0
-1
Total Points: -1
Source: Abt Associates Inc.
5.15
-------
5.2 MP&M Sector 2: Aircraft
5.2.1 Definition of Sector
The Aircraft sector includes the following 4-digit SIC industries:
SIC Industry
3 72 Aircraft and Parts
3721 Aircraft
3724 Aircraft Engines and Engine Parts
3728 Aircraft Parts and Auxiliary Equipment, NEC
458 Airports, Flying Fields, and Airport Terminal Services
4581 Airports, Flying Fields, and Airport Terminal Services
The Aircraft and Parts sector encompasses all manufacturers of aircraft and parts. Within SIC 372,
Aircraft and Parts, this MP&M sector is defined to exclude the 4-digit industries pertaining to guided missiles
and space vehicles, guided missiles and space vehicle propulsion and parts and guided missiles and space vehicle
equipment, not elsewhere classified.
5.2.2 Domestic Production Profile
After strong growth from 1984 to 1986, output from
the Aircraft sector remained relatively level, as shown in
Table 5.2-1. Real value added in 1982 amounted to $33.5
billion, while value of shipments totaled $59.3 billion.
During the strong growth years of 1984 - 1986, real value
added grew 24 percent to $41.6 billion. Aircraft output
continued to rise until 1990, when a 15.9 percent loss in value
added canceled those years of growth in the second half of the
period of analysis. Between 1986 and 1991, real value added
fell 3.6 percent, although it showed some recovery in 1991.
Nominal value added and nominal value of shipments increased in each year of the analysis except 1984. Overall,
the Aircraft sector industries exhibited more resistance to the 1990/91 recession than other MP&M industries.
$90.000
$80,000
| S70.000
g sso.ooo
.§ 150,000
a
a S40.000
$30,000
$20,000
Real Output
MP&M Sector 2: Aircraft
19
Value of
Shipments
^
1 ,
y
\
Y
/
/
Y
,
a 1983 1984 1985 19 6 1987 19
» r
eAdde
<,
1
-^
^^-
\~
^••i
1
i8 1989 1990 19 1
5.16
-------
The aggregate result over the period of analysis is that the Aircraft sector achieved the highest average annual
growth in real value added among MP&M sectors at 2.0 percent. The relatively high growth rate (among MP&M
sectors) contributes to the expectation that the Aircraft sector should be better able than other Phase I sectors to
pass on the costs of compliance to its customers.
Table 5.2-1. Output and Growth
Year
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
Year
1982-91
1983
1984
1985
1986
1987
1988
1989
1990
1991
$ millions., current
Value of
Shipments
52,026.7
58,111.3
57,430.1
66,058.0
74,303.1
77,278.2
79,552.5
83,979.6
94,640.3
102,380.8
Growth Rate,
Value of
Shipments
96.8%
11.7%
-1.2%
15.0%
12.5%
4.0%
2.9%
5.6%
12.7%
8.2%
Value
Added
29,402.2
30,099.0
18,081.8
35,798.3
37,756.0
40,790.1
40,492.7
44,889.4
44,903.2
49,046.3
current
Value
Added
66.8%
2.4%
-39.9%
98.0%
5.5%
8.0%
-0.7%
10.9%
0.0%
9.2%
$ millions. 1989 constant
Value of
Shipments
59,347.1
65,293.3
63,288.3
72,033.1
81,903.2
83,520.8
83,316.7
83,979.6
79,556.1
83.840.4
Growth Rate, $
Value of
Shipments
41.3%
10.0%
-3.1%
13.8%
13.7%
2.0%
-0.2%
0.8%
-5.3%
5.4%
Value
Added
33,549.5
33,851.7
20,045.5
39,076.2
41,634.8
44,115.0
42,366.0
44,889.4
37,769.0
40,120.0
constant
Value
Added
19.6%
0.9%
-40.8%
94.9%
6.5%
6.0%
-4.0%
6.0%
-15.9%
6.2%
Source: Department of Commerce
Changes in employment closely followed the pattern of real output between 1982 and 1991 (see Table
5.2-2). Total Aircraft sector employment fell 4 percent from 1982 to 1984, then increased each year until 1991,
when it declined sharply by 7.8 percent. Over the entire period, employment gained 5.4 percent, or 0.58 percent
per year, from 538,600 to 567,900 employees.
5.17
-------
Table 5.2-2. Employment and Productivity
Year
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
All Employees,
thousands
538.6
527.0
516.8
528.2
570.6
595.5
596.6
602.4
615.8
567.9
Production
Hours, millions
572.8
547.1
557.9
586.4
645.3
665.9
648.6
641.2
641.2
612.1
Real Value
Added/Hour
58.6
61.9
35.9
66.6
64.5
66.2
65.3
70.0
58.9
65.5
Growth Rate
Year
1982-91
1983
1984
1985
1986
1987
1988
1989
1990
1991
All Employees
5.4%
-2.2%
-1.9%
2.2%
8.0%
4.4%
0.2%
1.0%
2.2%
-7.8%
Production
Hours
6.9%
-4.5%
2.0%
5.1%
10.0%
3.2%
-2.6%
-1.1%
0.0%
-4.5%
Real Value
Added/Hour
11.9%
5.6%
-41.9%
85.5%
-3.2%
2.7%
-1.4%
7.2%
-15.9%
11.3%
Source: Department of Commerce
Labor productivity increased by a total of 11.9 percent during the same nine year interval; only in 1984
did productivity fall below the 1982 value of $58.6 of value added per production worker hour.
5.2.3 Effluent Discharging Facilities
The Aircraft sector includes an estimated 856 effluent dischargers, accounting for approximately 8
percent of MP&M facilities that discharge water and earning an average of $96.7 billion in annual revenue during
the period of 1987 to 1989, in 1989 constant dollars (see Table 5.2-3). These aircraft facilities, however, account
for over 18 percent of employment and almost 20 percent of revenues from Phase I MP&M dischargers, implying
that aircraft facilities are relatively large, compared to facilities in other sectors. This is true of non-discharging
facilities in this sector, also.
5.18
-------
Within the Aircraft sector, dischargers earn an estimated 100 percent of all revenues earned in the sector.
Due to the small sample size, this value, called the regulatory coverage ratio, is subject to substantial uncertainty.
However, the cost pass-through elasticities are multiplied by the regulatory coverage ratio of 1 to account for the
best estimate that there is no cost pass-through attenuation due same-sector competitors not subject to regulation.
Facilities in small businesses, as defined later in this chapter, comprise 83 percent of all facilities in the
Aircraft sector and employ 64 percent of production and non-production employees within the sector.
Aircraft sector facilities earned 96 percent of their revenues from sales in the Aircraft sector industries.
Over 83 percent of revenues reported by responding facilities in the Aircraft sector come from manufacturing
activities, while about 14 percent are derived from repairing and and the remainder from maintenance.
Table 5.2-3. National Estimates of Effluent Dischargers in the Aircraft Sector
# of Facilities % of Total Employment % of Total
All Aircraft
Small Business Owned Facilities
Not Small
Indirect Dischargers
Direct Dischargers
856
708
148
800
56
100%
83%
17%
93%
7%
552,389
82,224
470,165
455,886
96,503
100%
15%
85%
83%
17%
Source: Environmental Protection Agency
5.2.4 International Competitive Structure
The Aircraft sector is highly dependent on foreign buyers. As illustrated in Table 5.2-4, over 40 percent
of its sales come from the export market. This does not include military aircraft sold to foreign governments;
these are often tabulated as sales to the U.S. government, which then conducts the transfer to other countries.
The median export share among all MP&M sectors is 18.3 percent. As for imports, though, foreign aircraft
manufacturers held only an 11.0 percent share of the U.S. market in 1991. Though significant, this is slightly
below the 13.2 percent median import penetration among all MP&M sectors, hi sum, the expected effect of
international competitive structure on the Aircraft sector's ability to pass on compliance costs to its customers
is neutral in relation to other MP&M sectors.
5.19
-------
Table 5.2-4. 1991 Import and Export Shares, $ millions
Exports
Value of Shipments
Export Share
$42,342.1
$102,380.8
41.4%
Imports
Value of U.S. Shipments
Total Market
Import Share of Total
$12,616.3
$102,380.8
$114,997.1
$11.0
Source: Department of Commerce
Survey responses confirm the observation that the Aircraft sector is highly dependent on exports.
Respondents indicate that approximately 60 percent of their revenues are earned through exports. However, the
Survey does not quantify imports. The Survey responses also do not indicate whether respondents include
indirect sales of military aircraft to foreign buyers via the U.S. government as export sales.
U.S. manufacturers suffer from consolidation of their foreign competitors, foreign-government
investment in competitor industries — especially in research and development — and regulatory barriers to U.S.
exports. For instance, a combination of consolidation and government financing has helped give the Airbus
Industrie Consortium a 30 percent global market share in 1990.
Japanese aircraft manufacturers have successfully targeted niche markets in high technology areas such
as high speed propulsion systems, avionics and fuselages. Industry analysts attribute Japan's success to heavy
governmental investment in research and development.
On the positive side, the dissolution of the Soviet Union opened up a large gap in production. In 198 9,
Soviet production of aircraft, missiles and spacecraft matched that of the U.S. However, the decline in Eastern
European production may be only a temporary boon to U.S. firms. Aircraft manufacturers in Russia and the new
Eastern European nations are operating at about 30 percent of capacity, which means that they have some
potential to increase production with relatively low fixed costs.
5.2.5 Financial Condition and Performance
Operating margins, shown in Table 5.2-5, were calculated from the 1987 Census ofManufacturers by
subtracting the cost of materials and total payroll from the value of shipments. This data was available from
1982 to 1987, during which time margins increased from 21.8 percent in 1982 to a peak of 49.7 percent in 1984,
when output fell sharply, then continued to decline to 23.3 percent in 1987. This measure is rather coarse and
should be used primarily to examine the time-path of production costs within this analysis.
5.20
-------
Table 5.2-5. Operating Margins, S millions
Year
1982
1983
1984
1985
1986
1987
Value of
Shipments
59,347.1
65,293.3
63,288.3
72,033.1
81,903.2
83,520.8
Cost of
Materials
29,582.4
29,821.0
14,100.5
33,186.2
40,153.4
41,839.5
Payroll, all
employees
16,801.4
17,378.0
17,747.5
18,744.9
21,331.3
22,260.5
Operating
Margin
21.8%
27.7%
49.7%
27.9%
24.9%
23.3%
Source: Department of Commerce
Capacity utilization generally increased between 1982 and 1988, gaining an average of 2.2 percent per
year (see Table 5.2-6). In the last three years of the period of analysis, capacity utilization fell 7 percent, for a
net gain of 7 percent over the entire nine-year period. This pattern of declining utilization in the later part of the
decade is repeated in several other of the MP&M sectors and presages the onset of recession in 1990/91.
Table 5.2-6. Capacity Utilization and Capital Expenditures
Year
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
Capacity Utilization Index
100
103
110
110
108
111
115
115
112
107
New Capital Expenditures (millions)
$1,918.6
$1,721.7
$1,361.0
$2,651.6
$3,107.0
$2,742.4
$2,471.1
$2,800.1
$2,205.2
$2,306.2
Source: Department of Commerce / Abt Associates Inc.
Expenditures on new capital fluctuated widely during the 1982-1991 period of analysis, falling 29.0
percent in the first two years, then jumping 128.3 percent in the next two years, as capacity utilization remained
high and output recovered. In 1991, the Aircraft sector spent $2.3 billion on new capital — an increase of 4.6
percent from 1990 and 20.2 percent from 1982's value.
Table 5.2-7 shows a mixed picture of the financial condition of the Aircraft sector. With a pre-tax return
on assets of 15 percent, its profitability is the second lowest among the 7 Phase I sectors and lags the Phase I
sectors median of 22 percent. The sector's debt-to-asset ratio is also worse (higher) than the median, while the
5.21
-------
Aircraft sector's interest coverage ratio and current ratios lie at the median. Therefore, overall, the relatively low
pre-tax return on assets and high debt ratio suggest less than median potential among MP&M sectors in the
Aircraft sector's ability to pass on compliance costs to its customers.
Table 5.2-7. Financial Performance
Financial Measure
Pre-Tax Return on Assets
Interest Coverage Ratio
Debt-to-Asset Ratio
Current Ratio
Sector Value
15.00%
30.47
98%
2.64
Phase I
Median
22.00%
30.47
71%
2.64
Phase I
Rank
6
4
7
4
Source: Environmental Protection Agency
Distribution of Shipments by Size
MP&M Sector 2: Aircraft
5.2.6 Industry Structure and Competitiveness
Large establishments dominate
production in the Aircraft sector, but, in
numbers, smaller establishments have a
significant presence. Of the 1,621
establishments in the sector3, 67 percent have
fewer than 50 employees (see Table 5.2-8).
However, these smaller establishments account
for only 1.5 percent of the sector's shipments.
By contrast, 40 establishments with 2,500 or
more employees produce almost four-fifths of all
Aircraft sector shipments. The Small Business
Administration's small business threshold averages 1284 employees at the firm level4.
a"
3
CQ
<3
I
Ito4 20 to 49 250 to 499
Establishment Size, # of Employees
1987 Census of Manufacturers, Department of Commerce
4The Small Business Administration defines a small business as a firm with fewer than 1284 employees, where this
threshold is a calculated as a shipments-weighted mean of SBA thresholds for each 4-digit industry in Sector 2 Aircraft.
The SBA threshold is given in terms of firm-level employment, though, and are therefore not directly comparable to
facility employment values given here.
5.22
-------
Table 5.2-8. Distribution of Shipments
Cumulative Percentages in Sector
Size, by
Emploment
1 to 4
5 to 9
10 to 19
20 to 49
50 to 99
100 to 249
250 to 499
500 to 999
1000 to 2499
2500 +
Shipments, Number of Shipments, Number of
millions, 1987 Establishments millions, 1987 Establishments
$58.0
$91.7
$251.2
$731.3
$1,029.5
$2,384.7
$3,161.3
$4,213.1
$5,288.8
$60,068.4
362 f
187
231
299
160
160
96
52
34
40
0.1%
0.2%
0.5%
1.5%
2.8%
5.9%
10.0%
15.4%
22.3%
100.0%
22.3%
33.9%
48.1%
66.6%
76.4%
86.3%
92.2%
95.4%
97.5%
100.0%
Source: Department of Commerce
Table 5.2-9 shows that these largest manufacturers also generate almost three-fourths of sector
employment and 70.9 percent of new capital expenditures. The 50 percent of facilities with fewer than the
median number of employees generate no more than 2.0 percent of new capital expenditures and 1.7 percent of
value added.
5.23
-------
Table 5.2-9. Value Added and New Capital Expenditures by Employee Size, $ millions
Size, by
Employment
Ito4
5 to 9
10 to 19
20 to 49
50 to 99
100 to 249
250 to 499
500 to 999
1000 to 2499
2500 +
All Sizes
Number of
Employees, OOOs
0.6
1-2
3.1
9.3
11.2
25.5
33.6
37.2
52.2
421.5
595.4
Value Added,
millions
$35.3
$57.6
$155.3
$463.7
$655.5
$1,487.1
$2,059.5
$2,468.2
$3,198.0
$30,209.9
$40,790.1
New Capital
Exp., millions
$2.4
$4.4
$11.7
$31.1
$39.5
$93.3
$142.1
$120.7
$292.7
$1,797.9
$2,535.8
Number of
Establishments
362
187
231
299
160
160
96
52
34
40
1621
Cumulative Percentages in Sector
Size, by
Employment
Ito4
5 to 9
10 to 19
20 to 49
50 to 99
100 to 249
250 to 499
500 to 999
1000 to 2499
2500 +
Number of
Employees
0.1%
0.3%
0.8%
2.4%
4.3%
8.5%
14.2%
20.4%
29.2%
100.0%
Value Added
0.1%
0.2%
0.6%
1.7%
3.4%
7.0%
12.0%
18.1%
25.9%
100.0%
New Capital
Exp., millions
0.1%
0.3%
0.7%
2.0%
3.5%
7.2%
12.8%
17.6%
29.1%
100 0%
Number of
Establishments
22.3%
33.9%
48.1%
66.6%
76.4%
86.3%
92.2%
95.4%
97.5%
1000%
Source: Department of Commerce
The eight largest firms in each Aircraft sector produce an average of 77.3 percent of the sector's output,
substantially higher than the MP&M median of 55.9 percent. However, this high degree of horizontal integration
is not matched by vertical integration when measured indirectly by the sector's specialization ratio. With a
specialization ratio of 89 percent, only 11 percent of the Aircraft sector's production is comprised of non-Aircraft
sector commodities. This is slightly higher than the MP&M median specialization ratio of 84 percent. Thus, the
combined effect of domestic market structure considerations on the industry's ability to pass on compliance costs
is neutral.
5.24
-------
While further integration could help manufacturers compete internationally, in the face of highly
capitalized and centralized competitors abroad, the threat of anti-trust action diminishes efforts at mergers5.
Companies such as GE and Pratt & Whitney, though, pool research and development resources to take advantage
of scale economies and to reduce risk.
Table 5.2-10 confirms that the smallest establishments play a minor economic role in the aircraft sector.
Although they make up one-third of the sector, in numbers, establishments with fewer than 10 employees produce
only 0.2 percent of the sector's output and generate 0.3 percent of the sector's demand for employment and new
capital expenditures.
Table 5.2-10. Smallest Businesses (Fewer than 10 employees)
All Sector Smallest Businesses Smallest Business Share
# of Facilities
Shipments
Value Added
Employees, thousands
New Capital Expenditures
1,621.0
77,278.0
40,790.1
595.4
2,535.8
549.0
149.7
92.9
1.8
6.8
33.9%
0.2%
0.2%
0.3%
0.3%
Source: Department of Commerce
The Aircraft sector's major sources of demand are airlines and the Department of Defense. Both of these
sources have suffered severe cutbacks. Airline activity follows the general health of the economy, though, so one
would expect that source of demand to recover as the economy emerges from the most recent recession.
5.2.7 Structurally Derived Cost Pass-Through Ability
Table 5.2-11 assigns three negative points to the Aircraft sector for its relatively low profitability, its
high dependence on exports, and its relative high specialization ratio (low potential for vertical integration). Still,
in spite of high visibility inroads made by foreign manufacturers, the sector exhibits an import penetration share
of 11.0 percent, below the MP&M median. Further enhancing its market power, the sector's 8-firm concentration
ratio of 77.3 percent ranks third among MP&M sectors and the growth in real value added is the highest among
MP&M sectors. The net result is that the Aircraft sector's expected ability to pass-through compliance costs,
based on market structure and economic performance considerations, is scored at zero, or neutral, among MP&M
sectors.
SU. S Industrial Outlook, Department of Commerce
5.25
-------
Table 5.2-11. Structural Measures of Cost Pass-Through Capability
Concentration Ratio, 8-firm
Specialization Ratio
Import Penetration, %
Export Share, %
Growth Rate, %
Pre-Tax Return on Assets, %
Total Points:
Sector
Value
77.3
89.0
11.0
41.4
2.0
15.0
MP&M
Median
57.7
84.0
13.2
18.3
-0.6
22
Points
1
-1
1
-1
1
-1
0
Source: Abt Associates Inc.
5.26
-------
5.3 MP&M Sector 3: Electronic Equipment
5.3.1 Definition of Sector
The Electronic Equipment sector includes nine 4-digit SIC industries:
SIC
366 Communications Equipment
3661 Telephone and Telegraph Apparatus
3663 Radio and Television Broadcasting and Communications Equipment
3669 Communications Equipment, NEC
367 Electronic Components
3671 Electron Tubes
3675 Electronic Capacitors
3677 Electronic Coils, Transformers, and Other Inductors
3 678 Connectors for Electronic Applications
3679 Electronic Components, NEC
369 Electrical Machinery
3699 Electronic Machinery, Equipment, and Supplies, NEC
The Electronic Equipment sector encompasses all manufacturers of communications equipment, SIC 366.
Within SIC 367, Electronic Components, however, this MP&M sector excludes printed circuit boards,
semiconductors and related devices, electronic resistors and electronic connectors. Among manufacturers of
Miscellaneous Electrical Machinery, SIC 369, the MP&M Electronic Equipment sector includes only electrical
machinery, equipment and supplies, not elsewhere classified. It does not include batteries, electrical equipment
for internal combustion engines or magnetic and optical recording media.
5.3.2 Domestic Production Profile
Because of the redefinition of SIC codes, output data from the Department of Commerce before 1987
are not comparable with output data from years following 1987. However, Table 5.3-1 shows that real value
5.27
-------
added and value of shipments have shown a downward trend since 1984, except for the years of definitional
adjustment An effort was made to calculate a normalized growth rate for real value added over the entire period
of analysis by synthesizing an index of pre-redefinition years and post-definition years. This adjusted growth
index suggests that Electronic Equipment sector experienced an overall average annual growth rate of -0.2
percent, representing slightly less decline than the MP&M sector median growth rate of -0.6 percent. Thus,
economic growth in the industry suggests relatively better expected performance by the Electronic Equipment
Sector, compared to other MP&M sectors as a whole, in its ability to pass on compliance costs to customers.
Table 5.3-1. Output and Growth
Year
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
Year
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
S millions, current
Value of
Shipments Value Added
4,617.2 2,899.5
5,259.0 3,319.7
6,278.8 3,944.5
5,638.0 3,502.8
5,405.6 3,451.8
40,227.3 23,814.0
66,974.8 38,275.7
66,745.1 37,961.3
70,459.9 39,504.8
72,376.0 39,331.0
Growth Rate, current
Value of
Shipments Value Added
1467.5% 1256.5%
13.9% 14.5%
19.4% 18.8%
-10.2% -11.2%
-4.1% -1.5%
644.2% 589.9%
66.5% 60.7%
-0.3% -0.8%
5.6% 4.1%
2.7% -0.4%
S millions. 1989 constant
Value of
Shipments Value Added
5,291.2 3,321.6
5,918.7 3,734.0
6,914.9 4,341.1
6,129.3 3,806.1
5,771.3 3,683.4
42,124.8 24,896.2
69,103.7 39,478.4
66,745.1 37,961.3
57,826.7 32,505.3
56,870.9 30 940 7
Growth Rate. S constant
Value of
Shipments Value Added
974.8% 831.5%
11.9% 12.4%
16.8% 16.3%
-11.4% -12.3%
-5.8% -3.2%
629.9% 575.9%
64.0% 58.6%
-3.4% -3.8%
-13.4% -14.4%
-1 7% -4 8%
Source: Department of Commerce
5.28
-------
Real Output, 1982-86
MP&M Sector 3: Electronic Equipment
$7,000
$3,000
1983
1984
1986
Real Output, 1989-91
MP&M Sector 3: Electronic Equipment
$70,000
$60,000
$50,000
$40,000
$30,000
Valneof
Shipments
1989
Table 5.3-2 shows that during the first half of the data period — from 1982 to 1986 — employment in this sector
declined 11.6 percent, while real value added declined 10.9 percent, so productivity increased slightly. However,
after 1987, both labor productivity and real output suffered losses.
Table 5.3-2. Employment and Productivity
Year
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
All Employees, thousands
92.3
90.8
96.9
89.7
81.6
600.9
602.5
584.5
571.9
551 6
Production Hours, millions
130.1
132.7
150.4
127.0
118.2
666.2
673.5
658.7
643.4
6263
Real Value Added/Hour
25.5
28.1
28.9
30.0
31.2
37.4
58.6
57.6
50.5
49.4
Growth Rate
Year
1982-91
1983
1984
1985
1986
1987
1988
1989
1990
1991
All Employees
497.6%
-1.6%
6.7%
-7.4%
-9.0%
636.4%
0.3%
-3.0%
-2.2%
-3.6%
Production Hours
381.4%
2.0%
13.3%
-15.6%
-6.9%
463.6%
1.1%
-2.2%
-2.3%
-2.7%
Real Value Added/Hour
93.5%
10.2%
2.6%
3.8%
4.0%
19.9%
56.9%
-1.7%
-12.3%
-2.2%
Source: Department of Commerce
5.29
-------
The strength of two types of Communications Equipment (SIC 366) that have experienced growth —
wireless personal communications equipment and fiber optics — hinges upon technological breakthroughs and
regulatory actions. The Federal Communications Commission (FCC) occupies a pivotal role in the growth of
new products and markets. Its 1992 decision to allow cable television operators to enter the telecommunications
market, for instance, will likely spur demand for fiber optics and network equipment. Backed by federal courts,
Congress and the Administration, electronic communications firms are diversifying the media by which they
transmit signals to their audience. In numerous cases, the FCC appears to be relaxing its control over the product
lines or markets that a firm can participate in, with the result that the industry anticipates growth in
communications equipment, shipments overall. In other cases, the recent or imminent promulgation of
performance standards and guidelines is encouraging capital expenditures in emerging applications. Action by
private and international standard-setting organizations, as well as by the FCC, helps the industry commit to
technologies and services by reducing the risk that their products might be incompatible with or irrelevant to
future markets.
Wireless communications equipment faces an increasingly congested electromagnetic spectrum. The
FCC's continuing progress in allocating frequency bandwidths is supplemented by technological advances that
use bandwidths more efficiently. Industry observers expect television stations and cellular phone manufacturers
to benefit from these changes. The largest beneficiary of improved bandwidth management, though, may be the
wireless personal communications industry, an experimental area that looks forward to "huge public demand."6
That private analysts share this optimistic assessment of the potential for growth is clearly illustrated by the
FCC's auction of bandwidth for personal communications services (PCS), which drew opening bids five times
as high as the expected selling price7.
The regulatory environment is less important in the Electronic Components industry (SIC 367) than in
the communications segment. For instance, regulatory actions influence communications equipment
manufacturers who buy from the electronic components group. Environmental concerns over polychlorinated
biphenyls and halogenated fluids have changed some manufacturing practices in producing transformers and
cleaning electronic components. Intellectual properly right protection is less critical to the so-called "passive
U.S. Industrial Outlook, 1993. U.S. Department of Commerce.
''New York Times, July 26, 1994
5.30
-------
components" that make up this MP&M sector than to semiconductors and printed circuit boards, which are not
included in this analysis.
The Electronic Components sector has improved its competitiveness through cost control efforts such
as better inventory management and manufacturing techniques. However, in the face of a long-term weakening
of demand for some lower value added products and increased supply of those products by lower-cost foreign
producers, industries in this group are looking to diversification into higher value added products for continued
profitability. Some of these products lie outside of the MP&M Electronic Equipment sector.
5.3.3 Effluent Discharging Facilities
The Electronic Equipment sector includes an estimated 1,280 effluent dischargers, accounting for over
12 percent of MP&M facilities that discharge water and earning an average of $ 155.1 billion in annual revenue
during the period of 1987 to 1989, in 1989 constant dollars (see Table 5.3-3). These electronic equipment
facilities, however, account for over 23 percent of employment and nearly 32 percent of revenues from Phase I
MP&M dischargers, implying that Electronic Equipment facilities are relatively large compared to facilities in
other sectors.
Within the Electronic Equipment sector, dischargers earn an estimated 100 percent of all revenues earned
in the sector. Due to the small sample size, this value, called the regulatory coverage ratio, is subject to
substantial uncertainly. However, the cost pass-through elasticities are multiplied by the regulatory coverage ratio
of 1 to account for the best estimate that there is no cost pass-through attenuation due same-sector competitors
not subject to regulation.
Facilities in small businesses, as defined later in this chapter, comprise 45 percent of all facilities in the
Electronic Equipment sector and employ only 11 percent of production and non-production employees within
the sector.
Of facilities classified in the Electronic Equipment sector, 94 percent of revenues earned are earned from
sales in the Electronic Equipment sector industries. Nearly all revenues reported by responding facilities in the
Electronic Equipment sector come from manufacturing activities, with approximately 5.2 percent derived from
repairing and maintenance.
5.31
-------
Table 5.3-3. National Estimates of Effluent Dischargers in the Electronic Eauinment Secto
# of Facilities % of Total Employment % of Total
All Electronic Equipment
Small Business Owned Facilities
Not Small
Indirect Dischargers
Direct Dischargers
1,280
577
703
1,280
0
100%
45%
55%
100%
0%
700,036
75,143
624,893
700,036
o
100%
11%
89%
100%
0%
Source: Environmental Protection Agency
5.2.4 International Competitive Structure
In 1987, domestic electronic equipment industries shipped $72.4 billion worth of goods (see Table 5.3-
4). Of that, 18.3 percent was exported, which is the median value among MP&M sectors. The Survey responses
confirm that approximately 20 percent of electronic equipment revenues among effluent dischargers come from
export sales. In addition to domestic shipments, an additional $15.9 billion of Electronic Equipment sector
commodities were imported, yielding an import penetration ratio of 18.0 percent, which is higher than the median
value of 13.2 percent for all MP&M sectors. Thus, among MP&M sectors, the electronic sector is relatively more
exposed to foreign competition in trying to pass on the costs of effluent guideline compliance.
Table 5.3-4. 1991 Import and Export Shares, $ millions
[Exports
Value of Shipments
Export Share
$13,254.5 Imports
$72,376.0 Value of U.S. Shipments
Total Market
18.3% Import Share of Total
$15,880.1
$72,376.0
$88,256.1
18 0%
Source: Department of Commerce
The United States enjoys strong performance internationally in high technology electronic equipment.,
particularly communications equipment, such as networks, fiber optic cable and satellite communications
systems. However, it has won successes in the face of strong competition from Japan and Europe. In addition,
east and south Asia, Mexico and South America have penetrated commodity electronic equipment markets deeply,
especially electronic components industries, whose sales are very sensitive to labor costs. To some extent,
inroads by foreign producers have been mitigated by rapid growth in the international market.
In addition to cost differentials, technical standards in foreign nations influence the ability of the U.S.
Electronic Equipment sector to compete abroad. The benefits of lower prices on U.S. exports may be
5.32
-------
diminished, when domestically manufactured equipment performs to standards different from those adopted by
other countries, when foreign customers have preferential relationships within foreign suppliers, or when other
non-price trade barriers exist,
5.3.5 Financial Condition and Performance
The Electronic Components sector consists of low-margin manufacturers of a broad range of components
and high-margin manufacturers that focus on specialty components for niche markets. Financial performance
varies widely among firms because of this division and because of uneven adoption of improved delivery and
customer support services.
Operating margins, shown in Table 5.3-5, were calculated from the 1987 Census ofManufacturers by
subtracting the cost of materials and total payroll from the value of shipments. This data was available from
1982 to 1987, during which time margins increased from 32.0 percent in 1982toahighof 35.5 percent in 1985,
before falling slightly to 35.1 percent in 1986. The 1987 value reflects the SIC re-definitions during that year
and should not be compared with pre-1987 values. This measure of margin is rather coarse and should be used
primarily to examine the time-path of production costs within this analysis.
Table 5.3-5. Operating Margins, S millions
Year
1982
1983
1984
1985
1986
1987
Value of
Shipments
5,291.2
5,918.7
6,914.9
6,129.3
5,771.3
42,124.8
Cost of
Materials
2,028.2
2,249.6
2,693.2
2,241.4
2,084.4
28,930.6
Payroll, all Operating
employees Margin
1,572.1
1,633.1
1,845.3
1,709.5
1,658.8
16,304.4
32.0%
34.4%
34.4%
35.5%
35.1%
-7.4%
Source: Department of Commerce
The capacity utilization index shown on Table 5.3-6 represents the entire manufacturing sector; it is
scaled so that 100 represents the value of the index in 1982. Except for a 1.8 percent decline in 1986,
manufacturing capacity utilization rose in each year from 1982 to 1988 when it peaked at 15 percent over the
1982 level. It then declined in 1990 and 1991 for a net increase of 7 percent over the entire period.
5.33
-------
Table S.3-6. Capacity Utilization and Capital Expenditures
Year
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
Capacity Utilization Index
100
103
110
110
108
111
115
115
112
107
New Capital Expenditures (millions)
$317.0
$277.0
$324.0
$381.0
$230.0
$2,441.0
$2,516.0
$2,482.0
$2,069.0
$2,069.0
Source: Department of Commerce / Abt Associates Inc.
New capital expenditures in the Electronic Equipment sector fluctuated widely. Adjusting for the 1987
re-definition of the industries in this sector, new capital expenditures were approximately 15 percent less in 1991
than 1982.
Except when measured by its interest coverage ratio, the Electronic Equipment sector appears financially
robust (see Table 5.3-7). Its 22 percent return on assets falls at the median among MP&M Phase I sectors,
suggesting average expected cost pass-through potential among MP&M sectors. With a debt-to-asset ratio of
0.33, its long-term debt load is the lowest of Phase I sectors, and its current asset to current liability ratio of 4.78
amply exceeds the Phase I median.
Table 5.3-7. Financial Performance
Financial Measure
Pre-Tax Return on Assets
Interest Coverage Ratio
Debt-to- Asset Ratio
Current Ratio
Sector Value Phase I Median Phase I Rank
22.00%
15.71
33%
4.78
22.00%
30.47
71%
2.64
3
6
1
3
Source: Environmental Protection Agency
5.3.6 Industry Structure and Competitiveness
Though the median employment size falls in the 10 to 19 employee range, output in the Electronic
Equipment sector is distributed mainly among establishments in size categories above 100 employees (see Table
5.34
-------
5.3-8). Most of the sector's shipments come from the 3.1 percent of establishments with 250 or more employees.
The Small Business Administration's small business threshold averages 721 employees at the firm level8.
Table 5.3-8. Distribution of Shipments
Size, by
Emplomcnt
1 to 4
5 to 9
10 to 19
20 to 49
50 to 99
100 to 249
250 to 499
500 to 999
1000 to 2499
2500 +
Shipments,
millions, 1987
$250.8
$414.2
$966.1
$2,857.6
$3,907.3
$9,063.5
$9,593.2
$13,397.9
$9,815.6
$13,698.2
Number of
Establishments
1,756
858
950
1,257
763
693
258
124
56
26
Cumulative Percentages in Sector
Shipments,
millions, 1987
0.4%
1.0%
2.6%
7.0%
13.1%
27.3%
42.3%
63.2%
78.6%
100.0%
Number of
Establishments
26.1%
38.8%
52.9%
71.5%
82.8%
93.1%
96.9%
98.8%
99.6%
100.0%
Source: Department of Commerce
o
b:
1
ss
Distribution of Shipments by Size
MP&M Sector 3: Electronic Eq.
$14,000
1 to 4 20 to 49 250 to 499
Establishment Size, # of Employees
expenditures.
Most employment and new capital
expenditures also come from these mid-
sized and large establishments, which show
higher output and capital expenditure
numbers not only in absolute terms, but also
on a per-employee basis. In Table 5.3-9,
for instance, establishments with 2,500 or
more employees account for only 14.1
percent of total employment, but they
produce 21.6 percent of value added and
21.0 percent of the sector's new capital
8The Small Business Administration defines a small business as a firm with fewer than 721 employees, where this
threshold is a calculated as a shipments-weighted average of SBA thresholds for each 4-digit industry in Sector 3
Electronic Equipment. The SBA threshold is given in terms of firm-level employment, though, and are therefore not
directly comparable to facility employment values given here.
5.35
-------
Table 5.3-9. Value Added and New Capital Expenditures by Employee Size, S millions
Size, by
Employment
Ito4
5 to 9
10 to 19
20 to 49
50 to 99
100 to 249
250 to 499
500 to 999
1000 to 2499
2500 +
All Sizes
Number of
Employees, OOOs
3.2
5.9
13.4
39.9
54.1
107.8
93.7
113.8
84.7
85
601.5
Value Added,
millions
$142.7
$238.7
$579.4
$1,686.4
$2,313.0
$5,479.3
$5,264.7
$7,319.6
$5,942.3
$8,002.0
$36,968.1
New Capital
Exp., millions
$8.0
$12.5
$36.0
$85.1
$116.0
$309.5
$372.8
$517.3
$372.4
$487.2
$23168
Number ol
Establishments
1,756
858
950
1,257
763
693
258
124
56
26
6 741
Cumulative Percentages in Sector
Size, by
Employment
Ito4
5 to 9
10 to 19
20 to 49
50 to 99
100 to 249
250 to 499
500 to 999
1000 to 2499
2500 +
Number of
Employees
0.5%
1.5%
3.7%
10.4%
19.4%
37.3%
52.9%
71.8%
85.9%
100.0%
Value Added
0.4%
1.0%
2.6%
7.2%
13.4%
28.2%
42.5%
62.3%
78.4%
100.0%
New Capital
Expenditures
0.3%
0.9%
2.4%
6.1%
11.1%
24.5%
40.6%
62.9%
79.0%
100 0%
Number of
Establishments
26.1%
38.8%
52.9%
71.5%
82.8%
93.1%
96.9%
98.8%
99.6%
1000%
Source: Department of Commerce
At the level of the firm, as opposed to establishments, the output among large manufacturers is
distributed rather widely among those larger firms. The eight largest firms in the industry account for an average
of 52.2 percent of that industry's value of shipments. Thus, the Electronic Equipment sector is slightly less
concentrated than the MP&M median of 57.7 percent. However, with a specialization ratio of 51.0 percent, the
Electronic Equipment sector is considerably more diversified than the median MP&M sector and thus has a
higher possibility of being vertically integrated. In combination, these market structure characteristics yield a
neutral contribution to expected cost pass-through potential among MP&M sectors.
hi terms of contribution from smaller facilities, the smallest establishments, which employ fewer than
9 people, comprise 38.8 percent of all Electronic Equipment establishments. They employ 1.5 percent of workers
5.36
-------
but produce only 1.0 percent of output in the sector. Like other MP&M sectors, the smallest facilities also
contribute a disproportionately smaller share of new capital outlays (see Table 5.3-10).
Table 5.3-10. Smallest Businesses (Establishments with fewer than 10 employee)
All Sector Smallest Businesses Smallest Business Share
# of Facilities
Shipments, $ millions
Value Added, $ millions
Employees, thousands
New Capital Expenditures, $ millions
6,741.0
63,964.4
36,968.1
601.5
2,316.8
2,614.0
665.0
381.4
9.1
20.5
38.8%
1.0%
1.0%
1.5%
0.9%
Source: Department of Commerce
Demand for Communications Equipment segment commodities closely follows the general health of the
economy. Though business equipment is part of MP&M Phase II, businesses buy other communications
equipment pro-cyclically. Individual consumers are also important revenue sources, buying personal
communication devices such as cellular and conventional telephones.
The Electronic Components segment, however, faces a more internationalized customer base comprised
primarily of intermediate producers instead of retail customers. Its major customers include manufacturers of
consumer electronics, computers and communications equipment. In addition to being affected by the domestic
economy, the industry's financial performance is also affected by swings in currency exchange rates and by the
health of economies abroad.
Effluent dischargers report that 78 percent of their revenues, on average, are earned from domestic, non-
government sales. Export sales yield another 20 percent, followed last by government sales, which generate less
than 2 percent of revenues.
5.3.7 Structurally Derived Cost Pass-Through Ability
The Electronic Equipment sector appears less concentrated horizontally but more concentrated vertically,
than the median MP&M sector (see Exhibit K3). With regard to international competitive conditions, the sector
has modestly greater than average exposure to foreign competition. Imports have captured 18.0 percent of the
market, exceeding the MP&M median of 13.2 percent, for a contribution of -1. In addition, U.S. manufacturers
rely on exports for 18.3 percent of their shipments, the median value among MP&M sectors, for a contribution
of zero. The above average growth rate in real value added of -0.2 percent per year add a point, while the median
5.37
-------
PTRA ot'22 percent does not contribute either way. Thus, the Electronic Equipment sector is given a net score
ofO.
Table 5.3-11. Structural Measures of Cost Pass-Through Capability
Sector Value
Concentration Ratio, 8-firm
Specialization Ratio
Import Penetration, %
Export Share, %
Growth Rate, %
Pre-Tax Return on Assets, %
Total Points:
52.2
51.0
18.0
18.3
-0.2
22.0
MP&M
Median
57.7
84.0
13.2
18.3
-0.6
22
Poults
-1
1
-1
0
1
0
0
Source: Abt Associates Inc.
5.38
-------
5.4 MP&M Sector 4: Stationary Industrial Equipment
5.4.1 Definition of Sector
The Stationary Industrial Equipment sector includes the following 4-digit SIC industries:
SIC Indust
351 Engines and Turbines
3511 Steam, Gas, and Hydraulic Turbines, and Turbine Generator Set Units
3519 Internal Combustion Engines, NEC
353 Construction, Mining, and Materials Handling Machinery and Equipment
3533 Oil and Gas Field Machinery and Equipment
3534 Elevators and Moving Stairways
3535 Conveyors and Conveying Equipment
354 Metalworking Machinery and Equipment
3543 Industrial Patterns
3547 Rolling Mill Machinery and Equipment
3548 Electric and Gas Welding and Soldering Equipment
3549 Metalworking Machinery, NEC
355 Special Industry Machinery, Except Metalworking Machinery
3552 Textile Machinery
3553 Woodworking Machinery
3554 Paper Industries Machinery
3555 Printing Trades Machinery and Equipment
3556 Food Products Machinery
3559 Special Industry Machinery, NEC
356 General Industrial Machinery and Equipment
3561 Pumps and Pumping Equipment
3562 Ball and Roller Bearings
5.39
-------
3582
3585
3563 Air and Gas Compressors
3564 Industrial and Commercial Fans and Blowers and Air Purification Equipment
3565 Packaging Machinery
3566 Speed Changers, Industrial High-Speed Drives, and Gears
3567 Industrial Process Furnaces and Ovens
3568 Mechanical Power Transmission Equipment, NEC
3569 General Industrial Machinery and Equipment, NEC
555 Refrigeration and Service Industry Machinery
3581 Automatic Vending Machines
Commercial Laundry, Dry Cleaning, and Pressing Machines
Air-Conditioning and Warm Air Heating Equipment and Commercial and Industrial
Refrigeration Equipment
3586 Measuring and Dispensing Pumps
3589 Service Industry Machinery, NEC
359 Miscellaneous Industrial and Commercial Machinery and Equipment
3593 Fluid Power Cylinders and Actuators
3594 Fluid Power Pumps and Motors
3596 Scales and Balances, Except Laboratory
3599 Industrial and Commercial Machinery and Equipment, NEC
361 Electric Transmission and Distribution Equipment
3612 Power, Distribution, and Specialty Transformers
3613 Switchgear and Switchboard Apparatus
362 Electrical Industrial Apparatus
3621 Motors and Generators
3629 Electrical Industrial Apparatus, NEC
735 Miscellaneous Equipment Rental and Leasing
7353 Heavy Construction Equipment Rental and Leasing
735 9 Equipment Rental and Leasing, NEC
5.40
-------
5.4.2 Domestic Production Profile
The Stationary Industrial Equipment sector is a highly competitive aggregation of industries engaged
mostly in the production of intermediate, capital goods. Its health depends on the general health of domestic and
overseas economies and terms of trade.
1
$140,000
w $140,000
O
1=3 $120,000
M" $100,000
£
^ $80,000
T3
g; $60,000
o\
""" $40,000
$20,000
Real Output
vdP&M Sector 4: Stationary Ind. Eq.
"^
1982
Vali
X'
^^
ieof
mcnts
'
1984
N
*v
>
/
y
/
/
1986
/
,/
/
J
k.
N
X
Value Added 1
1988
1990
Like the Electronic Equipment sector,
the Stationary Industrial Equipment sector
includes 4-digit SIC industries that were
substantially redefined in 1987, making
comparison of output data difficult.
Nevertheless, except for the years of
redefinition —1987 and, arguably, 1988 — real
value added fell five out of eight years,
including a combined decline of 21.5 percent in
1990 and 1991. Data for shipments show a similar result with declines in four of the eight years. These data
suggest that the Stationary Industrial Equipment sector is experiencing a long-term, general decline in total
production and sales (see Table 5.4-1).
5.41
-------
Table 5.4-1. Output and Growth
Year
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
Year
1982-91
1983
1984
1985
1986
1987
1988
1989
1990
1991
S millions, current
Value of
Shipments
72,011.1
65,222.6
74,910.9
75,161.8
57,922.5
100,274.2
138,621.8
147,309.1
148,907.1
146.7057
Growth Rate.
Value of
Shipments
103.7%
-9.4%
14.9%
0.3%
-22.9%
73.1%
38.2%
6.3%
1.1%
-1.5%
Value
Added
37,898.9
33,185.4
39,714.5
38,460.2
28,899.1
56,580.8
76,488.7
79,984.3
78,832.0
77 685 1
current
Value
Added
105.0%
-12.4%
19.7%
-3.2%
-24.9%
95.8%
35.2%
4.6%
-1.4%
-1.5%
$ millions, 1989 constant
Value of
Shipments
83,387.8
73,698.8
82,731.3
81,569.7
62,358.9
107,994.9
144,973.7
147,309.1
122,897.8
118443 5
Growth Rate. S
Value of
Shipments
42.0%
-11.6%
12.3%
-1.4%
-23.6%
73.2%
34.2%
1.6%
-16.6%
-3.6%
Value
Added
43,796.3
37,442.0
43,810.6
41,718.0
31,116.9
61,024.7
80,041.7
79,984.3
65,143.5
62 805 5_
constant
Value
Added
43.4%
-14.5%
17.0%
-4.8%
-25.4%
96.1%
31.2%
-0.1%
-18.6%
-3.6%
Source: Department of Commerce
The same procedure used to develop a synthesized growth rate over the entire period of analysis for the
Electronic Equipment sector was also used for the Stationary Industrial Equipment sector. The resulting index
indicates that real value added grew at an average annual rate of -2.2 percent over the period of analysis, putting
the Stationary Industrial Equipment sector at the bottom among Phase I MP&M sectors in terms of growth in
production. Thus, the economic growth performance of the sector suggests less than favorable expected
performance in the ability to pass on compliance costs relative to other MP&M sectors.
Total employment is also obscured by the industry redefinition for the years 1987/88, but it follows a
similar pattern to value added in the other years of the analysis period (see Table 5.4-2). From 1982 to 1986 (the
year before the SIC redefinition), employment fell by 137,000 or 17 percent. Another 23,000 jobs were lost in
the sector between 1987 and 1991.
5.42
-------
Table 5.4-2. Employment and Productivity
Year
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
Growth
Year
1982-91
1983
1984
1985
1986
1987
1988
1989
1990
1991
All Employees,
thousands
802.9
703.9
732.1
703.3
665.2
1,231.8
1,269.8
1,288.8
1,265.2
1,208.6
Rate
All Employees
50.5%
-12.3%
4.0%
-3.9%
-5.4%
85.2%
3.1%
1.5%
-1.8%
-4.5%
Production
Hours, millions
1,000.4
889.3
979.3
927.9
731.3
1,664.3
1,754.5
1,791.1
1,733.9
1,635.0
Production
Hours
63.4%
-11.1%
10.1%
-5.2%
-21.2%
127.6%
5.4%
2.1%
-3.2%
-5,7%
Real Value
Added/Hour
43.8
42.1
44.7
45.0
42.6
36.7
45.6
44.7
37.6
38.4
Real Value
Added/Hour
-12.3%
-3.8%
6.3%
0.5%
-5.4%
-13.8%
24.4%
-2.1%
-15.9%
2.2%
Source: Department of Commerce
Productivity followed a cyclical pattern, reaching peaks in 1985 and 1988 and troughs in 1983, 1987
and 1990. Productivity ranged from a high of $45.60 per production hour in 1988 to a low of $36.70 per hour
in 1987. Over the entire ten-year period, productivity fell 12.3 percent.
5.4.3 Effluent Discharging Facilities
The Stationary Industrial Equipment sector includes an estimated 2,769 effluent dischargers, accounting
for over 26 percent of MP&M Phase I facilities that discharge water and earning an average of $52.9 billion in
annual revenue during the period of 1987 to 1989, in 1989 constant dollars (see Table 5.4-3). These Stationary
Industrial Equipment facilities, however, account for only 13.8 percent of employment and 11 percent of revenues
from Phase I MP&M dischargers, implying that Stationary Industrial Equipment facilities are relatively small,
compared to facilities in other sectors.
5.43
-------
Facilities in small businesses, as defined later in this chapter, comprise 80 percent of all facilities in the
Stationary Industrial Equipment sector and employ 34 percent of production and non-production employees
within the sector.
Within the Stationary Industrial Equipment sector, dischargers earn an estimated 39.7 percent of all
revenues earned in the sector. Due to the small sample size, this value, called the regulatory coverage ratio, is
subject to substantial uncertainty. However, the cost pass-through elasticities are multiplied by the regulatory
coverage ratio to account for the best estimate of cost pass-through attenuation due to the size of sector's market
that is not subject to regulation.
Among facilities classified in the Stationary Industrial Equipment sector, 85 percent of revenues are
earned from sales in the Stationary Industrial Equipment sector industries. Survey respondents report that 90
percent of revenues in this sector come from manufacturing activities, with less than 10 percent derived from
repairing and maintenance.
Table 5.4-3. National Estimates of Effluent Dischargers in the Stationary Industrial Equipment Sector
All Stationary Industrial Equipment
Small Business Owned Facilities
Not Small
Indirect Dischargers
Direct Dischargers
# of Facilities
2,769
2,207
562
2,421
348
% of Total
100%
80%
20%
87%
13%
Employment
419,464
140,836
278,628
288,409
131,055
% of Total
100%
34%
66%
69%
Source: Environmental Protection Agency
5.4.4 International Competitive Structure
The Stationary Industry Equipment sector faces mixed conditions in international markets. The industry
has been successful in export sales. Of the $146.7 billion worth of shipments by the Stationary Industrial
Equipment sector, $31.9 billion, or 21.7 percent, were sold to foreign customers in 1991 (see Table 5.4-4). This
value exceeds the median export share of 18.3 percent for the MP&M sector in general. Thus, a substantial share
of the sector's revenues may be subject to pressure from sometimes non-regulated international competitors in
trying to pass on compliance costs in these export markets.
5.44
-------
Table 5.4-4. 1991 Import and Export Shares, $ millions
Exports $31,866.8 Imports $22,321.4
Value of Shipments $146,705.7 Value of U.S. Shipments $146,705.7
Total Market $169,027.1
Export Share
21.7% Import Share of Total
13.2%
Source: Department of Commerce
At the same time, the sector fares no better than the MP&M average in its degree of protection in
domestic markets from international competitors. Imports in 1991 amounted to $22.3 billion, or 13.2 percent
of both imported and domestic shipments, yielding a trade surplus of $9.6 billion. The import penetration value
is the median value among MP&M sectors.
Overall, international markets appear well-developed and competitive, with success determined largely
by prices and quality. For instance, some oil exploration equipment manufacturers have prioritized improving
their technical support and service through overseas joint ventures to target the international market. The most
significant trade barriers center around standard-setting policy, aimed at increasing equipment compatibility and
predictability. The current ISO 9000 initiative will likely reduce these barriers by setting uniform standards
internationally. Industry observers also expect the North American Free Trade Agreement to help the Stationary
Industrial Equipment sector.
While most of the international market sales of this sector are to industrialized economies, several
subgroups within the sector, for example the air conditioning and food products machinery industries, also derive
large and growing shares of export revenue from developing countries.
5.4.5 Financial Condition and Performance
Operating margins, shown in Table 5.4-5, were calculated from the 1987 Census ofManufacturers by
subtracting the cost of materials and total payroll from the value of shipments. These data were available from
1982 to 1987. In the first four years of this period, margins decreased from 30.2 percent in 1982 to 21.7 percent
in 1986. The continued decline in 1987 to 13.4 percent includes the indeterminate effect of the 1987 SIC
redefinition. This measure of margin is rather coarse and should be used primarily to examine the time-path of
production costs within this analysis.
5.45
-------
Table S.4-S. Operating Margins, $ millions
Year
1982
1983
1984
1985
1986
1987
Value of
Shipments
83,387.8
73,698.8
82,731.3
81,569.7
62,358.9
107,994.9
Cost of
Materials
38,648.8
34,557.8
39,618.2
39,130.3
30,527.7
59,513.3
Payroll, aU
employees
19,525.7
17,487.4
19,163.6
18,763.8
18,283.5
34,040.8
Operating
Margin
30.2%
29.4%
28.9%
29.0%
21.7%
13.4%
Source: Department of Commerce
The capacity utilization index shown on Table 5.4-6 represents the entire manufacturing sector; it is
scaled so that 100 represents the value of the index in 1982. Except for a 1.8 percent decline in 1986,
manufacturing capacity utilization rose from 1982 to a high in 1988 of 15 percent over the 1982 level. It then
declined in 1990 and 1991 for anet increase of 7 percent over the entire period.
Table 5.4-6. Capacity Utilization and Capital Expenditures
Year
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
Capacity Utilization Index
100
103
110
110
108
111
115
115
112
107
New Capital Expenditures (millions)
$3,641.3
$2,201.8
$2,530.7
$2,399.2
$1,895.4
$4,017.4
$3,550.9
$4,271.7
$3,788.4
$3,456.2
Source: Department of Commerce / Abt Associates Inc.
New capital expenditures fluctuated widely. In the first half of the analysis period, new capital
expenditures fell 50.4 percent, or $1.8 billion, despite a 14.9 percent increase in 1984. Since the 1987 SIC
redefinitions, new capital expenditures have fallen nearly 14.0 percent, to a value of $3.5 billion in 1991.
Table 5.4-7 shows that industries in the Stationary Industrial Equipment sector earned, on average, a pre-
tax return on assets of 22 percent, which is equal to the median value for Phase I sectors, suggesting an average
expected cost pass-through potential based on this financial measure. Its debt-to-asset ratio is also at the median,
5.46
-------
at 0.71. The sector's interest coverage ratio of 34.35 and current ratio of 2.28 are slightly above and slightly
below the median, respectively. These financial measures do not suggest difficulty in the sector's ability to
finance capital outlays for regulatory compliance.
Table 5.4-7. Financial Performance
Financial Measure
Pre-Tax Return on Assets
Interest Coverage Ratio
Debt-to-Asset Ratio
Current Ratio
Sector Value
22.00%
34.35
71%
2.28
Phase I Median
22.00%
30.47
71%
2.64
Phase I Rank
4
3
4
5
Source: Environmental Protection Agency
5.4.6 Industry Structure and Competitiveness
The Stationary Industrial Equipment sector's major customers span a broad range of construction and
manufacturing industries. They are numerous, pro-cyclical and competitive; there is no evidence of any
extraordinary market power on the part of this sector's customers.
Of 37,848' establishments in the Stationary Industrial Equipment sector, 57 percent have fewer than 10
employees. Table 5.4-8 shows the value of shipments accounted for by establishments of various size categories.
Most output comes from medium to large establishments. Those with between 100 and 999 employees account
for 55.1 percent of the sector's value of shipments. The Small Business Administration's small business threshold
averages 637 employees at the firm level2.
1 1987 Census of Manufacturers, Department of Commerce
2The Small Business Administration defines a small business as a firm with fewer than 637 employees, where this
threshold is a calculated as a shipments-weighted average of small business thresholds for each 4-digit industry in Sector
4 Stationary Industrial Equipment. The SBA threshold is given in terms of firm-level employment, though, and are
therefore not directly comparable to facility employment values given here.
5.47
-------
Table 5.4-8. Distribution of Shipments
Size, by
Employment
1 to 4
5 to 9
10 to 19
20 to 49
50 to 99
100 to 249
250 to 499
500 to 999
1000 to 2499
2500 +
Shipments,
millions, 1987
$1,586.3
$3,122.1
$6,102.8
$13,065.2
$13,315.5
$24,516.0
$21,824.5
$22,072.9
$12,898.7
$5,623.3
Number of
Establishments
13,823
7,578
6,653
5,324
2,113
1,480
541
244
77
15
Cumulative Percentages in Sector
Shipments,
millions, 1987
1.3%
3.8%
8.7%
19.2%
30.0%
49.7%
67.3%
85.1%
95.5%
100.0%
Number of
Establishments
36.5%
56.5%
74.1%
88.2%
93.8%
97.7%
99.1%
99.8%
100.0%
Source: Department of Commerce
The same distribution pattern applies to value added and new capital expenditures, also (see Table 5.4-
9). Establishments with 10 or more employees expend more on new capital than smaller ones, per dollar of
output. While the median size is between 5 and 9 employees, establishments with between 100 and 249
employees form the largest cohort by total employment. These 3.9 percent of establishments account for 19.3
percent of employment and value added and 17.1 percent of new capital expenditures.
in
t
I
-------
Table 5.4-9. Value Added and New Capital Expenditures by Employee Size, $ millions
Size, by
Employment
Ito4
5 to 9
10 to 19
20 to 49
50 to 99
100 to 249
250 to 499
500 to 999
1000 to 2499
2500 +
All Sizes
Number of
Employees, OOOs
27.0
50.8
90.8
162.0
146.5
238.0
203.6
180.3
99.9
32.8
7,237.7
Value Added,
millions
1,052.5
2,029.1
3,863.0
7,812.8
7,639.0
13,261.3
11,922.9
11,656.9
6,660.4
2,854.9
68,752.8
New Capital
Exp., millions
45.2
95.5
208.5
363.2
359.3
637.0
621.1
573.0
615.1
209.9
3,727.8
Number of
Establishments
13,823
7,578
6,653
5,324
2,113
1,480
541
244
77
15
37,848
Cumulative Percentages in Sector
Size, by
Employment
Ito4
5 to 9
10 to 19
20 to 49
50 to 99
100 to 249
250 to 499
500 to 999
1000 to 2499
2500 +
Number of
Employees
2.2%
6.3%
13.7%
26.8%
38.7%
58.1%
74.6%
89.2%
97.3%
100.0%
Value Added
1.5%
4.5%
10.1%
21.5%
32.6%
51.9%
69.2%
86.2%
95.8%
100.0%
New Capital
Expenditures
1.2%
3.8%
9.4%
19.1%
28.7%
45.8%
62.5%
77.9%
94.4%
100.0%
Number of
Establishments
36.5%
56.5%
74.1%
88.2%
93.8%
97.7%
99.1%
99.8%
100.0%
100.0%
Source: Department of Commerce
Market structure measures suggest less than average ability among MP&M sectors for the Stationary
Industrial Equipment sector to pass on its costs of compliance. The eight largest firms in each 4-digit industry
in this sector produce an average of 45.5 percent of the industry's output, which is less than the median value
among MP&M sectors of 57.7 percent. Thus, relative to other MP&M sectors, horizontal concentration does
not favor the industry's ability to pass on costs. At the same time, the industry is only moderately diverse. The
industry's specialization ratio of 84 equals the median of 84 percent for all MP&M sectors: 16 percent of the
output of establishments in the Stationary Industrial Equipment sector falls into an SIC category other than one
of the Stationary Industrial Equipment industries. Thus, the industry is neutral relative to other sectors in the
expected ability to benefit from vertical integration. The combined effect of the horizontal and vertical integration
considerations is thus negative in regard to expected cost pass-through potential.
5.49
-------
On the other extreme, the smallest establishments generate less than a proportionate share of output and
new capital expenditures relative to employment. Table 5.4-10 examines establishments with fewer than 9
employees. These establishments comprise 56.5 of all Stationary Industrial Equipment establishments and
account for 6,3 percent of the sector's employment. However, the establishments generate only 3.8 percent of
shipments and new capital expenditures.
Table S.4-10. Smallest Businesses (Fewer than 10 employees)
All Sector Smallest Businesses Smallest Business Share
# of Facilities
Shipments, $ millions
Value Added, $ millions
Employees, thousands
New Capital Expenditures, $ millions
37,848.0
124,127.3
68,752.8
1,231.7
3,727.8
21,401.0
4,708.4
3,081.6
77.8
1407
56.5%
3.8%
4.5%
6.3%
3 g%
rewcrtnan 10 employees
Source: Department of Commerce
The Stationary Industrial Equipment sector depends heavily upon non-government sales. Domestic non-
government customers provide 72 percent of its revenue. Exports generate another 19 percent of revenues, with
government sales accounting for the remaining 9 percent of revenues.
5.4.7 Structurally Derived Cost Pass-Through Ability
Compared to most MP&M sectors, the Stationary Industrial Equipment sector is horizontally less
integrated but no more vertically integrated, as indicated on Table 5.4-11. This sector's horizontal concentration
ratio is below the MP&M median and the specialization ratio is at the median for a combined score from domestic
market structure considerations of-1. The sector's dependence on foreign customers also imply modestly
negative performance in structurally derived cost pass-through ability: exports account for 21.7 percent of the
sector's shipments compared to an MP&M median of 18.3 percent for a score of-1; while imports are at the
median 13.2 percent share of U.S. sales, for a score of zero. Finally, the growth in real value added contributes
negatively, but the PTRA is at the mean. This yields a total score of -3 for the Stationary Industrial Equipment
sector.
5.50
-------
Table 5.4-11. Structural Measures
of Cost Pass-Through Capability
Sector Value MP&M Median
Concentration Ratio, 8-firm
Specialization Ratio
Import Penetration, %
Export Share, %
Growth Rate, %
Pre-Tax Return on Assets, %
Total Points:
45.5
84.0
13.2
21.7
-2.2
22.0
57.7
84.0
13.2
18.3
-0.6
22
Points
-1
0
0
-1
-1
0
-3
Source: Abt Associates Inc.
5.51
-------
5.5 MP&M Sector 5: Ordnance
5.5.1 Definition of Sector
The Ordnance sector includes the following 4-digit SIC industries:
SIC Industry
348 Ordnance and Accessories, NEC
3482 Small Arms Ammunition
3483 Ammunition, Except for Small Arms
3484 Small Arms
3489 Ordnance and Accessories NEC
The Ordnance sector encompasses the entirely of the 3-digit SIC group, Ordnance and Accessories, NEC.
The SIC manual further describes this 3-digit group as including all ordnance-related hardware except vehicles
and guided missiles.
5.5.2 Domestic Production Profile
Ordnance sector output increased steadily over most of the period of analysis but then declined steeply
in the most recent years included in this profile. The cumulative result is a significant contraction in the industry
over the period of the analysis (see Table 5.5-1). In real dollars, value added increased 45.5 percent from $4.0
billion in 1982 to $5.8 billion in 1987 but then declined each of the following years to a low in 1991 of $3.6
billion, 9.7 percent below real value added in 1982. Real shipments reached a peak in 1988 of $8.4 billion, a year
later than the peak in real value added, before declining to $5.5 billion in 1991 for a net loss of 4.1 percent over
the entire period. The net negative annual growth in real value added of -1.0 percent per year is below the median
for MP&M sectors and thus contributes negatively to expected cost pass-through potential relative to other
MP&M sectors.
5.52
-------
Table 5.5-1. Output and Growth
Year
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
Year
1982-91
1983
1984
1985
1986
1987
1988
1989
1990
1991
S millions, current
Value of
Shipments
4,992.8
5,366.2
6,049.2
6,547.5
6,780.0
7,643.6
8,021.8
7,341.6
6,725.1
6,673.1
Growth Rate,
Value of
Shipments
33.7%
7.5%
12.7%
8.2%
3.6%
12.7%
4.9%
-8.5%
-8.4%
-0.8%
Value
Added
3,441.5
3,961.8
4,302.9
4,537.6
4,777.4
5,349.0
5,194.4
5,117.7
4,741.1
^,378.0
current
Value
Added
27.2%
15.1%
8.6%
5.5%
5.3%
12.0%
-2.9%
-1.5%
-7.4%
-7.7%
S millions. 1989
Value of
Shipments
5,731.5
6,118.1
6,773.1
7,189.5
7,461 .4
8,218.2
8,408.2
7,341.6
5,686.2
5,494.0
Growth Rate, $
Value of
Shipments
-4.1%
6.7%
10.7%
6.1%
3.8%
10.1%
2.3%
-12.7%
-22.5%
-3.4%
constant
Value
Added
3,962.5
4,538.9
4,828.3
5,003.5
5,269.4
5,763.7
5,448.2
5,117.7
3,985.6
3,576.3
constant
Value
Added
-9.7%
14.5%
6.4%
3.6%
5.3%
9.4%
-5.5%
-6.1%
-22.1%
-10.3%
Source: Department of Commerce
Employment and productivity also
increased, although more erratically than output,
before declining in the last years of the period of
analysis (see Table 5.5-2). Employment increased
28.4 percent between 1982 and 1987, reaching a
high of 87,700 employees, but then declined each of
the following years to 68,700 employees in 1991,
for a net loss of 13.5 percent over then entire period.
Except for declines in 1985 and 1988, labor
productivity rose to a maximum of $56.80 per
$9,000
$8,000
OT
E
H $6,000
=3
O
^ WOO
00
o\
""" $4,000
$3,000
Real Output
MP&M Sector 5: Ordnance
f^
/
1982
Value of
Shipments
A
,--
1984
^^
J
/
/
H
fc — ,
L
N
^
Value Added
|
1986
1 —
\
\
1 — ,
^
i
1988 1990
5.53
-------
production hour in 1989. In the next two years, however, productivity lost IS.Opercent. Over the entire ten-year
period, productivity gained 16.1 percent.
Table 5.5-2. Employment and Productivity
Year
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
Growth
Year
1982-91
1983
1984
1985
1986
1987
1988
1989
1990
1991
All Employees,
OOOs
79.4
77.0
79.6
82.4
82.4
87.7
86.5
77.0
70.5
68.7
Rate
All Employees
-13.5%
-3.0%
3.4%
3.5%
0.0%
6.4%
-1.4%
-11.0%
-8.4%
-2.6%
Production
Hours, millions
95.3
95.2
97.9
102.2
101.5
108.0
107.5
90.1
79.5
74.1
Production
Hours
-22.2%
-0.1%
2.8%
4.4%
-0.7%
6.4%
-0.5%
-16.2%
-11.8%
-6.8%
Real Value
Added/Hour
41.6
47.7
49.3
49.0
51.9
53.4
50.7
56.8
50.1
48.3
Real Value
Added/Hour
16.1%
14.7%
3.4%
-0.7%
6.0%
2.8%
-5.0%
12.1%
-11.7%
-3.7%
Source: Department of Commerce
5.5.3 Effluent Discharging Facilities
The Ordnance sector includes an estimated 190 effluent dischargers, accounting for less than 2 percent
of MP&M facilities that discharge water and earning an average of $21.7 billion in annual revenue during the
period of 1987 to 1989, in 1989 constant dollars (see Table 5.5-3). These Ordnance facilities, however, account
for 4.3 percent of employment and 4.4 percent of revenues from Phase I MP&M dischargers, implying that
Ordnance facilities are relatively large, compared to facilities in other sectors.
Within the Ordnance sector, dischargers earn an estimated 100 percent of all revenues earned in the
sector. Due to the small sample size, this value, called the regulatory coverage ratio, is subject to substantial
5.54
-------
uncertainty. However, the cost pass-through elasticities are multiplied by the regulatory coverage ratio of 1 to
account for the best estimate that there is no cost pass-through attenuation due same-sector competitors not
subject to regulation.
The sector is dominated by firms that do not qualify as small businesses under estimated Small Business
Administration thresholds. Facilities in small businesses, as defined later in this chapter, comprise 37 percent
of all facilities in the Ordnance sector and employ only 9 percent of production and non-production employees
within the sector.
Only 66 percent of revenues earned by facilities classified in the Ordnance sector are in fact earned from
sales in the Ordnance sector industries. These facilities, in aggregate, participated strongly in other MP&M sector
production. Nearly all revenues reported by responding facilities in the Ordnance sector come from
manufacturing activities, with 0.7 percent derived from repair and maintenance.
Table 5.5-3. National Estimates of Effluent Dischargers in the Ordnance Sector
# of Facilities % of Total Employment % of Total
All Ordnance
Small Business Owned Facilities
Not Small
Indirect Dischargers
Direct Dischargers
190
70
119
164
26
100%
37%
63%
86%
14%
130,818
12,110
118,708
108,019
22,799
100%
9%
91%
83%
17%
Source: Environmental Protection Agency
5.5.4 International Competitive Structure
The Ordnance sector enjoyed a trade surplus of $1.9 billion in 1991. Of the $6.7 billion in shipments
by the Ordnance sector, $2.4 billion, or 36.3 percent, were sold to foreign customers in 1991 (see Table 5.5-4).
Imports amounted to $500 million, or 7.0 percent of both imported and domestic shipments. The sector's
dependence on exports thus substantially exceeds the median for MP&M sectors in general while import
penetration is less than the median. The net effect in terms of expected contribution to cost pass-through
potential is thus neutral.
5.55
-------
Table S.5-4. 1991 Import and Export Shares, $ millions
Exports
Value of Shipments
$2,421.8 Imports $500.7
$6,673.1 Value of U.S. Shipments $6,673.1
Total Market $7,173.8
I Export Share
36.3% Import Share of Total
70%
Source: Department of Commerce
Because ordnance sales are significantly driven by the stock of weapons systems sold over many prior
years, shipments in general show less year-to-year variation than in many other manufacturing industries. Since
the domestic armed forces rapidly replace older equipment with new technologies, exports will likely remain an
import source of stable demand for a product line3.
5.5.5 Financial Condition and Performance
Operating margins, shown in Table 5.5-5 were calculated from the 1987 Census of Manufacturers by
subtracting the cost of materials and total payroll from the value of shipments. This data was available from
1982 to 1987, during which period margins showed no significant pattern in fluctuating around a mean of 35.9
percent The 1982 value of 32.7 percent, though was markedly lower than subsequent year values. This measure
of margin is rather coarse and should be used primarily to examine the time-path of production costs within this
analysis.
Table 5.5-5. Operating Margins, $ millions
Year
1982
1983
1984
1985
1986
1987
Value of
Shipments
5,731.5
6,118.1
6,773.1
7,189.5
7,461.4
8,218.2
Cost of Payroll, all Operating
Materials employees Margin
1,788.6
1,666.0
1,973.7
2,297.3
2,353.7
2,582.7
2,068.6
2,092.2
2,278.6
2,366.7
2,458.3
2,659.3
32.7%
38.6%
37.2%
35.1%
35.5%
36.2%
Source: Department of Commerce
The capacity utilization index shown on Table 5.5-6 represents the entire manufacturing sector; it is
scaled so that 100 represents the value of the index in 1982. Except for a 1.8 percent decline in 1986,
*To the extent that the Ordnance sector includes military sales, this sector's dependence on foreign trade may restrict the
sector's cost pass-through ability less than other sectors. Military sales may be less price elastic, since they depend
significantly on political and military forces.
5.56
-------
manufacturing capacity utilization rose from 1982 to a high in 1988 of 15 percent over the 1982 level. It then
declined in 1990 and 1991 for a net increase of 7 percent over the entire period.
Table 5.S-6. Capacity Utilization and Capital Expenditures
Year
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
Capacity Utilization
100
103
110
110
108
111
115
115
112
107
Index New Capital Expenditures (million)
$157.0
$120.9
$177.4
$150.8
$170.2
$191.6
$160.5
$114.4
$101.6
$849
Source: Department of Commerce / Abt Associates Inc.
In the first half of the period, new capital expenditures fluctuated widely but reached a peak of $ 191.6
million — 22.3 percent higher than in 1982. For the remainder of the period, new capital expenditures fell each
year, to a low of $84.9 million in 1991 — 45.9 percent of the 1982 value. The drop in capital outlays parallels
the contraction in industry employment and value added that occurred during the later part of the analysis period.
Table 5.5-7 shows that industries in the Ordnance sector were, on average, more profitable than the
median MP&M sector, earning a pre-tax return on assets of 31 percent, compared to a median of 22 percent. In
fact, the financial performance and condition of the Ordnance sector exceeds the median sector for all of the
measures given in Table 5.5-7. Thus, despite the relative weakening of the sector in terms of total production
and employment, the sector continues to show good financial performance as evidenced from the Survey facility
sample. The superior financial performance and condition suggest that the industry should be able to readily
finance the capital outlays needed for compliance with effluent guidelines and, moreover, supports the expectation
that the sector will be able to pass on the costs of compliance to its customers.
5.57
-------
Table 5.5-7. Financial Performance
1 Financial Measure Sector Value Phase I Median Phase I Rank
Pre-Tax Return on Assets
Interest Coverage Ratio
Debt-to-Asset Ratio
Current Ratio
31.00%
94.88
73%
1.54
22.00%
30.47
71%
2.64
1
1
5
7
Source: Environmental Protection Agency
5.5.6 Industry Structure and Competitiveness
Of 37,848" establishments in the Ordnance sector, 47 percent have fewer than 10 employees. Table 5.5-
8 shows the value of shipments accounted for by establishments of various size categories. Most output comes
from medium to large establishments. The 4.8 percent of establishments with between 1000 and 2499 employees
accountfor 41.1 percent of the sector's value of shipments. The Small Business Administration's small business
threshold averages 1121 employees at the firm level5.
Table 5.5-8. Distribution of Shipments
Size, by
Employment
Ito4
5 to 9
10 to 19
20 to 49
50 to 99
100 to 249
250 to 499
500 to 999
1000 to 2499
2500 +
Shipments,
millions, 1987
$10.3
$32.9
$33.8
$79.3
$88.5
$1,303.2
$700.2
$962.1
$3,137.8
$1,295.3
Number ol
Establishments
114
62
41
39
18
34
24
19
18
7
Cumulative Percentages in Sector
Shipments,
millions, 1987
0.1%
0.6%
1.0%
2.0%
3.2%
20.3%
29.4%
42.0%
83.1%
100 0%
Number of
Establishments
30.3%
46.8%
57.7%
68.1%
72.9%
81.9%
88.3%
93.4%
98.1%
1000%
Source: Department of Commerce
Table 5.5-9 shows that most employment and output in the sector comes from establishments with 500
or more employees.
1987 Census of Manufacturers, Department of Commerce
5The Small Business Administration defines a small business as a firm with fewer than 1122 employees, where this
threshold is a calculated as a shipments-weighted average of small business thresholds for each 4-digit industry in Sector
5 Ordnance. The SB A threshold is given in terms of firm-level employment, though, and are therefore not directly
comparable to facility employment values given here.
5.58
-------
o
J
Distribution of Shipments by Size
MP&M Sector 5: Ordnance
Ho 4 20 to 49 25010499
Establishment Size, # of Employees
Table 5.5-9. Value Added and New Capital Expenditures by Employee Size, $ millions
Size, by
Employment
1 to 4
5 to 9
10 to 19
20 to 49
50 to 99
100 to 249
250 to 499
500 to 999
1000 to 2499
2500 +
Number of
Employees, OOOs
0.2
0.5
0.4
1.2
1.3
12.9
10.2
11.3
31.2
18.3
87.5
Value Added,
millions
$7.3
$20.6
$22.2
$47.6
$50.6
$830.4
$459.1
$607.0
$2,134.2
$1,170.1
$5,349.1
New Capital
Exp., millions
$0.2
$0.6
$1.0
$2.6
$2.9
$77.3
$15.3
$24.0
$53.8
$0.0
$177.7
Number of
Establishments
114
62
41
39
18
34
24
19
18
7
376
Cumulative Percentages in Sector
Size, by
Employment
Ito4
5 to 9
10 to 19
20 to 49
50 to 99
100 to 249
250 to 499
500 to 999
1000 to 2499
2500 +
Number of
Employees
0.2%
0.8%
1.3%
2.6%
4.1%
18.9%
30.5%
43.4%
79.1%
100 0%
Value Added
0.1%
0.5%
0.9%
1.8%
2.8%
18.3%
26.9%
38.2%
78.1%
100.0%
New Capital
Expenditures
0.1%
0.5%
1.0%
2.5%
4.1%
47.6%
56.2%
69.7%
100.0%
100.0%
Number of
Establishments
30.3%
46.8%
57.7%
68.1%
72.9%
81.9%
88.3%
93.4%
98.1%
100.0%
Source: Department ot Commerce
5.59
-------
Market structure considerations suggest neutral performance for the Ordnance sector in pass-through
capability relative to other MP&M sectors. The industry is the second most horizontally concentrated among
Phase I sectors. The eight largest firms in the Ordnance sector produce 81.2 percent of that sector's output,
considerably greater than the median eight-firm concentration ratio 55.9. However, the industry is less diverse
than other MP&M sectors as its specialization ratio of 88 exceeds the median of 84 percent for all MP&M
sectors. The combined contribution from horizontal and vertical integration to the sector's expected ability to
pass on costs is thus neutral.
On the other end of the size spectrum, the smallest establishments generate less than a proportionate
share of output, employment and new capital expenditures. Table 5.5-10 examines establishments with fewer
than 9 employees. These establishments comprise 46.8 percent of all Ordnance establishments, but they generate
only 0.6 percent of shipments, 0.5 percent of new capital expenditures and 0.8 percent of employment in this
sector.
All Sector Smallest Businesses Smallest Business Share
# of Facilities
Shipments, $ millions
Value Added, $ millions
Employees, thousands
New Capital Expenditures, $ millions
376.0
7,643.4
5,349.1
87.5
177.7
176.0
43.2
27.9
0.7
0.8
46.8%
0.6%
0.5%
0.8%
Source: Department of Commerce
In its dependence on government purchases for revenue, the Ordnance sector is second only to the Space
sector. Almost 51 percent of Ordnance sector revenues come from sales to the government. An additional 37
percent derives from non-governmental domestic sales, and the remaining 12 percent of revenues come from
exports.
5.5.7 Structurally Derived Cost Pass-Through Ability
Compared to other MP&M sectors, the Ordnance sector is more integrated horizontally but below the
median with respect to expected vertical integration, as indicated on Table 5.5-11. Thus, the sector derives a
score of zero from horizontal and vertical integration. The sector's dependence on foreign markets is also mixed
for a combined score of zero from these considerations. It exhibits very low import penetration, but the share
of shipments purchased by foreign customers is approximately twice that of the MP&M median. Finally, the
5.60
-------
relatively high pre-tax return on assets of 31 percent is offset by the relatively low growth in real value added of
-1.0 percent year to give the Ordnance sector a net score of zero.
Table 5.5-11. Structural Measures of Cost Pass-Through Capability
Concentration Ratio, 8-firm
Specialization Ratio
Import Penetration, %
Export Share, %
Growth Rate, %
Pre-Tax Return on Assets, %
Total Points'
Sector
Value
81.2
88.0
7.0
36.3
-1.0
31.0
MP&M
Median
57.7
84.0
13.2
18.3
-0.6
22.0
Points
1
-1
1
-1
-1
1
0
Source: Abt Associates Inc.
5.61
-------
5.6 MP&M Sector 6: Aerospace
5.6.1 Definition of Sector
The Aerospace sector includes the following 4-digit SIC industries:
SIC Industry
376" Guided Missiles and Space Vehicles and Parts
3761 Guided Missiles and Space Vehicles
3764 Guided Missile and Space Vehicle Propulsion Units and Propulsion Unit Parts
3769 Guided Missile and Space Vehicle Parts and Auxiliary Equipment, NEC
The Aerospace sector encompasses all manufacturers of missiles, space vehicles and propulsion and
parts, SIC 376. Within SIC 372, Space, this MP&M sector excludes aircraft, aircraft engines, engine parts, and
auxiliary equipment, NEC (See Sector 2 Aircraft).
5.6.1 Domestic Production Profile
New directions in national space policy
encourage optimism among Aerospace sector
manufacturers that have suffered from recent
cutbacks in defense spending. The current policy
is to focus on low-cost, unmanned missions. A
new class of launch vehicles, called the Medium
Launch Vehicle 3 (MLV-3), is being developed to
address that need. In addition, the Congress and
White House have indicated support for a low-
cost, reliable launch system, designated the
National Launch System (NLS), also to meet the
needs of primarily unmanned missions.
Sector output increased steadily over most of the period of analysis but then declined steeply in the most
recent years. The net effect is a modest contraction in the level of production activity in the industry for the
period of analysis (see Table 5.6-1). In real dollars, value added increased 67.9 percent from $11.6 billion in
$30,000
3
.2 $25,000
t3 $20,000
"3
•o
o\
0? $15,000
$10,000
Real Output
MP&M Sector 6: Space
t
Value of
Shipments
/
X
/
y
/
/
V
/
/
1982 1984
^
Iva
1
^
^
hie Added
1 ..,—
1
r
\
\
\
\
•>
x
1986 ' 1988 19 0
5.62
-------
1982 to $19.4 billion in 1988 but then declined each of the following years to a low in 1991 of $11.3 billion, 2.3
percent below real value added in 1982. Nevertheless, the average annual growth in real value added of-0.3
percent remains above the MP&M sector median of-0.6 percent for a positive contribution to expected cost pass-
through potential. Real shipments reached a peak in 1989 of $29.5 billion before declining to $19.1 billion in
1991 for a net gain of 12.8 percent over the entire period.
Table 5.6-1. Output and Growth
Year
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
Year
1982-91
1983
1984
1985
1986
1987
1988
1989
1990
1991
S millions, current
Value of
Shipments Value Added
14,398.1 9,856.6
16,711.9 11,683.2
19,496.2 14,638.4
24,736.9 17,108.4
26,696.1 17,781.3
26,285.1 18,256.8
28,193.7 18,931.1
29,497.7 19,142.6
30,554.0 19,284.2
28,964.5 17,103.1
Growth Rate, current
Value of
Shipments Value Added
101.2% 73.5%
16.1% 18.5%
16.7% 25.3%
26.9% 16.9%
7.9% 3.9%
-1.5% 2.7%
7.3% 3.7%
4.6% 1.1%
3.6% 0.7%
-5.2% -11.3%
S millions. 1989 constant
Value of
Shipments Value Added
16,903.6 11,574.4
18,984.1 13,266.2
21,803.2 16,368.5
27,127.0 18,739.6
28,460.1 18,957.7
27,478.6 19,082.0
28,936.4 19,429.2
29,497.7 19,142.6
20,602.4 13,011.1
19,063.8 11,303.6
Growth Rate, $ constant
Value of
Shipments Value Added
12.8% -2.3%
12.3% 14.6%
14.9% 23.4%
24.4% 14.5%
4.9% 1.2%
-3.4% 0.7%
5.3% 1.8%
1.9% -1.5%
-30.2% -32.0%
-7.5% -13.1%
Source: Department of Commerce
Recent declines were exacerbated by upgrading older missiles with new navigational systems, rather than
building new missiles. The overall need for some types of missiles is also being reviewed, with an eye toward
decreasing stocks in the wake of the demise of the Soviet Union.
5.63
-------
Employment grew strongly during the first half of the period of analysis, rising 55.6 percent from
146,300 in 1982 to 227,700 in 1986 (see Table 5.6-2). However, most of those gains were reversed as
employment fell during four of the next five years, ending at 177,700 in 1991.
Table 5.6-2. Employment and Productivity
Year
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
All Employee,
thousands
146.3
162.7
175.8
217.8
227.7
213.6
223.7
221.0
200.3
177.7
Production
Hours, millions
120.1
132.0
146.2
169.4
165.8
159.2
164.4
154.2
142.3
123.5
Real Value
Added/Hour
96.4
100.5
112.0
110.6
114.3
119.9
118.2
124.1
91.4
91.5
Growth Rate
Year
1982-91
1983
1984
1985
1986
1987
1988
1989
1990
1991
All Employees
21.5%
11.2%
8.1%
23.9%
4.5%
-6.2%
4.7%
-1.2%
-9.4%
-11.3%
Production Hours
2.8%
9.9%
10.8%
15.9%
-2.1%
-4.0%
3.3%
-6.2%
-7.7%
-13.2%
Real Value
Added/Hour
-5.0%
4.3%
11.4%
-1.2%
3.4%
4.8%
-1.4%
5.0%
-26.3%
0 1%
Source: Department of Commerce
Labor productivity posted a 28.7 percent gain between 1982 and 1989, despite two years when rapid
employment gains outstripped gains in value added, resulting in decreasing productivity in 1985 and 1988. In
1990, all the gains in the preceding years were erased by a 26.3 percent drop; productivity ended up in 1991 at
$91.50 per production hour.
The Aerospace sector faces a relatively oligopsonistic market, dominated by the Department of Defense
and the National Aeronautics and Space Administration. However, more competitive customer groups are
gaining importance. Foreign governments buy missile systems and launch vehicles for satellites. Domestically,
5.64
-------
the communications industry is an important non-governmental customer. Industry observers predict that, if the
Federal Communications Commission approves a low orbit, smaU satellite configuration, demand for launch
services will grow strongly.
5.6.3 Effluent Discharging Facilities
The Space sector includes an estimated 545 effluent dischargers, accounting for approximately 5 percent
of MP&M facilities that discharge water and earning an average of $54.4 billion in annual revenue during the
period of 1987 to 1989, in 1989 constant dollars. These Space sector facilities, however, account for over 19
percent of employment and 11 percent of revenues from Phase I MP&M dischargers, implying that Space sector
facilities are relatively large, compared to facilities in other sectors.
Within the Space sector, dischargers earn an estimated 100 percent of all revenues earned in the sector.
Due to the small sample size, this value, called the regulatory coverage ratio, is subject to substantial uncertainty.
However, the cost pass-through elasticities are multiplied by the regulatory coverage ratio of 1 to account for the
best estimate that there is no cost pass-through attenuation due same-sector competitors not subject to regulation.
Facilities in small businesses, as defined later in this chapter, comprise 75 percent of all facilities in the
Space sector but employ only 6 percent of production and non-production employees within the sector.
Facilities classified in the Space sector earned 97 percent of their revenues from sales in the Space sector
industries. Nearly all revenues reported by responding facilities in the Space sector come from manufacturing
activities, with only 1.7 percent deriA^ed from repair and no revenue reported in the Survey from maintenance
activities.
Table 5.6-3 National Estimates of Effluent Dischargers in the Space Sector
# of Facilities % of Total Employment % of Total
All Space
Small Business Owned Facilities
Not Small
Indirect Dischargers
Direct Dischargers
545
411
134
213
332
100%
75%
25%
39%
61%
579,592
34,736
544,857
272,122
307,471
100%
6%
94%
47%
53%
Source: Environmental Protection Agency
5.65
-------
5.6.4 International Competitive Structure
The international market currently has a negligible presence in the Aerospace sector, in terms of imports
or exports, as shown in Table 5.6-4. In 1991, exports amounted to $29 million, against imports of $11 million,
yielding a trade surplus of $18 million. However, both imports and exports constituted well under 1 percent of
total shipments. Thus, these data suggest that the Aerospace sector should be relatively insulated from
international competition in its efforts to pass on the costs of complying with effluent guidelines.
Table 5.6-4. 1991 Import and Export Shares, $ millions
Exports
Value of Shipments
Export Share
$29.0 Imports
$28,964.5 Value of U.S. Shipments
Total Market
0.1% Import Share of Total
$11.0
$28,964.5
$28,975.0
00%
Source: Department of Commerce
These statistics do not include exports to a foreign government via the U.S. government. Those sales,
which are a conventional way of selling aerospace equipment abroad, are counted by the Commerce Department
as domestic shipments to the U.S. government, rather than exports. It is unclear to what extent Survey
respondents included such indirect exports in estimating export sales as the source of approximately 11 percent
of their revenues.
Also, in the face of dwindling federal funds, foreign governments and foreign private sector clients are
crucial to the future of the Aerospace sector. Japan, China and the European Community have begun to compete
briskly with the U.S. for international launch services. There are some examples of cooperation, though, between
U.S. and foreign manufacturers that can help both. General Electric, for instance, is designing advanced engines
with Japanese and European manufacturers1.
5.6.5 Financial Condition and Performance
Operating margins, shown in Table 5.6-5, were calculated from the 1987 Census ofManufacturers by
subtracting the cost of materials and total payroll from the value of shipments. This data was available from
1982 to 1987, during which period margins showed no significant pattern in fluctuating around a mean of 36.3
percent. This measure of margin is rather coarse and should be used primarily to examine the time-path of
production costs within this analysis.
1U.S, Industrial Outlook, Department of Commerce
5.66
-------
Table 5.6-5. Operating Margins, $ millions
Year Value of Shipments
1982
1983
1984
1985
1986
1987
16,903.6
18,984.1
21,803.2
27,127.0
28,460.1
27,478.6
Cost of Materials
5,914.4
6,294.7
6,728.9
9,053.0
9,539.1
JL776.2
Payroll, all employees
5,261.2
5,738.4
6,635.2
8,392.0
8,702.1
8,486.6
Operating Margin
33.9%
36.6%
38.7%
35.7%
35.9%
37.2%
Source: Department of Commerce
The capacity utilization index shown on Table 5.6-6 represents the entire manufacturing sector; it is
scaled so that 100 represents the value of the index in 1982. Except for a 1.8 percent decline in 1986,
manufacturing capacity utilization rose from 1982 to high in 1988 of 15 percent over the 1982 level. It then
declined in 1990 and 1991 for a net increase of 7 percent over the entire period.
Table 5.6-6. Capacity Utilization and Capital Expenditures
Year Capacity Utilization Index New Capital Expenditures (millions)
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
100
103
110
110
108
111
115
115
112
107
$540.4
$714.2
$1,075.2
$1,491.5
$1,419.3
$1,125.8
$1,054.2
$1,121.0
$591.9
$386.9
Source: Department of Commerce / Abt Associates Inc.
At the beginning of the period of analysis, new capital expenditures rose 176 percent, from $540 million
in 1982 to $1.5 billion in 1985. However, except for 1988, new capital expenditures then fell in every subsequent
year, reaching a low for the period of $3 87 million in 1991 — a28.4 percent decline from the initial value. The
fall in capital outlays again coincides with the relative weakening of production and employment in the industry
that occurred during the later part of the analysis period.
Table 5.6-7 shows that industries in the Aerospace sector earned a pre-tax return on assets of 22 percent,
which is equal to the MP&M median. This supports the expectation that the sector will have an average ability
5.67
-------
to pass on the costs of compliance to its customers, based on this financial measure alone. The Aerospace sector
exhibited a better than average interest coverage ratio of 43.21 and a debt-to-asset ratio of 0.51. However, its
current ratio, at 2.0, was the second lowest among MP&M sectors.
Table 5.6-7. Financial Performance
Financial Measure
Pre-Tax Return on Assets
Interest Coverage Ratio
Debt-to-Asset Ratio
Current Ratio
Sector Value Phase I Median Phase I Rank
22.00%
43.21
51%
2.00
22.00%
30.47
71%
2.64
5
2
3
6
Source: Environmental Protection Agency
5.6.6 Industry Structure and Competitiveness
Of 1412 establishments in the Aerospace sector, most have more than 50 employees. Table 5.6-8 shows
the value of shipments accounted for by establishments of various size categories. Most output comes from
medium to large establishments. The largest size cohort is of large establishments with 2,500 or more employees.
There are 27 such establishments, accounting for almost one in five establishments and producing almost 85
percent of the sector's shipments. The Small Business Administration's small business threshold averages 1000
employees at the firm level3.
2 1987 Census of Manufacturers, Department of Commerce
3The Small Business Administration defines a small business as a firm with fewer than 1000 employees, where this
threshold is a calculated as a shipments-weighted average of small business thresholds for each 4-digit industry in Sector
6 Aerospace. The SBA threshold is given in terms of firm-level employment, though, and are therefore not directly
comparable to facility employment values given here.
5.68
-------
Table 5.6-8. Distribution of Shipments
Size, by
Employment
Ito4
5 to 9
10 to 19
20 to 49
50 to 99
100 to 249
250 to 499
500 to 999
1000 to 2499
2500 +
Shipmcnts,
millions, 1987
$120.1
$0.0
$11.0
$83.3
$65.5
$155.2
$371.4
$1,120.4
$2,031.4
$22,326.8
Number of
Establishments
13
6
13
24
13
15
9
10
11
27
Cumulative Percentages in Sector
Shipments, 1987
0.5%
0.5%
0.5%
0.8%
1.1%
1.7%
3.1%
7.3%
15.1%
100.0%
Number of
Establishments
9.2%
13.5%
22.7%
39.7%
48.9%
59.6%
66.0%
73.1%
80.9%
100.0%
Source: Department ofCommerce
I
•s
I
C-
oo
ON
Distribution of Shipments by Size
MP&M Sector 6: Aerospace
Table 5.6-9 confirms the
dominance of these largest
establishments, as they account for
86.5 percent of employment and 86.8
percent of value added, hi fact, the
eight largest firms in each 4-digit
industry in the sector produce, on
average, 89 percent of each industry's
shipments, the highest among MP&M
sectors. The specialization ratio of 76
indicates that, on average, each
Aerospace sector industry's shipments
included 24.0 percent shipments of commodities other than its primary SIC commodity. Thus, the sector has both
higher horizontal concentration and lower specialization than the median MP&M sector. Both conditions suggest
the likely presence of market power in the industry and associated ability to pass on compliance costs to
customers.
$25,000
$20,000
$15,000
$10,000
$5,000
$0
1 to 4 20 to 49 250 to 499
Establishment Size, # of Employees
2500 +
5.69
-------
Table 5.6-9. Value Added and New Capital Expenditures by Employee Size, $ millions
Size, by Number of
Employment Employees, OOOs
Ito4
5to9
10 to 19
20 to 49
50 to 99
100 to 249
250 to 499
500 to 999
1000 to 2499
2500 +
All Sizes
Cumulative Percentages
Size, by
Employment
Ito4
5 to 9
10tol9
20 to 49
50 to 99
100 to 249
250 to 499
500 to 999
1000 to 2499
2500 +
2.3
0.0
0.1
0.7
0.8
2.0
3.1
13.5
17.0
174.1
213.6
in Sector
Number of
Employees
1.1%
1.1%
1.1%
1.5%
1.8%
2.8%
4.2%
10.5%
18.5%
100.0%
Value Added,
millions
$73.0
$0.0
$8.0
$61.4
$45.1
$106.8
$242.6
$734.6
$1,191.7
$15,793.6
$18,256.8
Value Added
0.4%
0.4%
0.4%
0.8%
1.0%
1.6%
2.9%
7.0%
13.5%
100.0%
New Capital
Exp., millions
$1.7
$0.0
$0.4
$9.7
$0.6
$14.7
$13.0
$49.1
$53.0
$933.5
57,075.7
New Capital
Expenditures
0.2%
0.2%
0.2%
1.1%
1.2%
2.5%
3.7%
8.3%
13.2%
100.0%
Number of
Establishments
13
6
13
24
13
15
9
10
11
27
141
Number of
Establishments
9.2%
13.5%
22.7%
39.7%
48.9%
59.6%
66.0%
73.1%
80.9%
100.0%
Source: Department of Commerce
The smallest establishments generate less than a proportionate share of output and new capital
expenditures, compared to their employment share. Table 5.6-10 examines establishments with fewer than 9
employees. These establishments comprise 13.5 percent of all Aerospace sector establishments and employ 1.1
percent of Aerospace sector employees. However, they generate only 0.5 percent of shipments, and 0.2 percent
of new capital expenditures in this sector.
5.70
-------
Table 5.6-10. Smallest Businesses (Establishments with fewer than 10 employees)
All Sector Smallest Businesses Smallest
# of Facilities
Shipments, $ millions
Value Added, $ millions
Employees, thousands
New Capital Expenditures $ millions
141.0
26,285.1
18,256.8
213.6
1,075.7
19.0
120.1
73.0
2.3
1.7
Business Share
13.5%
0.5%
0.4%
1.1%
0.2%
Source: Department or Commerce
The Space sector is the most heavily dependent Phase I sector on government sales, deriving
approximately 61 percent of its revenue from such sales. An additional 29 percent of revenues comes from
domestic non-governmental sales, with the remaining 11 percent coming from exports.
5.6.7 Structurally Derived Cost Pass-Through Ability
The Aerospace sector achieves the highest overall score amting MP&M sectors in its expected ability
to pass on compliance costs from market structure and economic performance considerations. Compared to most
MP&M sectors, the Aerospace sector is more integrated, both horizontally and vertically, than the median
MP&M sector, as indicated on Table 5.6-11. This sector's concentration ratio is above the MP&M median. At
the same time, 24 percent of the sector's output consists of commodities in other SIC categories, suggesting
above-average vertical integration. In the point system used in this analysis, this sector's likely advantages in
market power due to concentration are augmented by its current isolation from foreign markets: both export
dependence and import penetration are well below the MP&M sector medians. The Space sector experienced
slightly higher average growth (-0.3 percent) than the MP&M median. Only the sector's pre-tax return on assets,
which fell at the MP&M median of 22 percent, failed to earn the sector a positive point under the cost pass-
through methodology. This gives the Space sector a total score of+5.
Table 5.6-11. Structural Measures of Cost Pass-Through Capability
Sector Value MP&M Median Points
Concentration Ratio, S-firm
Specialization Ratio
Import Penetration, %
Export Share, %
Growth Rate, %
Pre-Tax Return on Assets, %
Total Points-
89.0
76.0
0.0
0.1
-0.3
22.0
57.7
84.0
13.2
18.3
-0.6
22.0
1
1
1
1
1
0
J
Source: Abt Associates Inc.
5.71
-------
5.7 MP&M Sector 7: Mobile Industrial Equipment
5.7.1 Definition of Sector
The Mobile Industrial Equipment sector includes the following 3- and 4-digit SIC industries:
SIC Industry
352 Farm and Garden Machinery and Equipment
3523 Farm Machinery and Equipment
3524 Lawn and Garden Tractors and Home Lawn and Garden Equipment
353 Construction, Mining, and Materials Handling Machinery and Equipment
3531 Construction Machinery and Equipment
3532 Mining Machinery and Equipment, Except Oil and Gas Field Machinery and Equipment
3536 Overhead Traveling Cranes, Hoists, and Monorail Systems
3637 Industrial Trucks, Tractors, Trailers, and Stackers
379 Miscellaneous Transportation Equipment
3795 Tanks and Tank Components
The Mobile Industrial Equipment sector includes disparate industries in three major groups:
1. Farm machinery and equipment;
2. Garden machinery and equipment; and
3. Construction, mining and materials handling machinery and
equipment.
5.7.2 Domestic Production Profile
Growth prospects in the Mobile Industrial Equipment sector appear dim, as farm machinery
manufacturers already face over capacity. Manufacturers fear that conservation legislation might make much
5.72
-------
of this capacity obsolete. Throughout the sector, stiff competition keeps cost-cutting at the forefront of survival
strategy. On the product design front, though, the sector has benefited from occasional innovations that increase
product versatility and decrease labor requirements.
Except in 1984, Mobile Industrial Equipment sector output declined during the first half of the period
of analysis (see Table 5.7-1). In the second half, a brief rebound4 was followed by continuing declines. In real
dollars, value added fell 19.3 percent, from $15.5
billion in 1982 to $12.5 billion in 1991. The
average annual rate of growth for real value added
of-2.0 percent is among the lowest in the MP&M
sectors. The contribution to expected cost pass-
through potential from this factor is thus negative.
Real shipments reached a peak in 1989 of $37.9
billion before declining to $28.2 billion in 1991
for a net loss of 13.3 percent over the entire
period. Overall, the contraction in real output in
the Mobile Industrial Equipment sector was the
greatest among the Phase I MP&M sectors.
$40.000
$35,000
CO
c
•J3 $30.000
$25,000
en
«
= S20.000
•O
oo $15.000
Oj
$10,000
$5.000
Real Output
MP&M Sector 7: Mobile Ind. Eq.
I
X
^•••n
A
?*^
^
Value of
v Shipments
*- —
1982
1984 ' 19
\
\
\
\
\
86
/
/
/
/
r
H
1988
s
N
^
's,
s
"*-
1990
4 The data from 1987 to 1989 were subject to an indeterminate shock from the 1987 SIC
redefinitions.
5.73
-------
Table 5.7-1. Output and Growth
Year
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
Year
1982-91
1983
1984
1985
1986
1987
1988
1989
1990
1991
S millions.
Value of
Shipments
29,226.4
26,807.2
30,733.0
29,001.4
26,922.1
16,272.1
35,637.8
37,852.5
39,931.7
35,525.8
current
Value
Added
13,894.8
12,300.8
14,270.5
13,057.0
12,612.3
7,773.0
16,729.2
17,118.7
17,943.8
15,818.4
Growth Rate, current
Value of
Shipments
21.6%
-8.3%
14.6%
-5.6%
-7.2%
-39.6%
119.0%
6.2%
5.5%
-11.0%
Value
Added
13.8%
-11.5%
16.0%
-8.5%
-3.4%
-38.4%
115.2%
2.3%
4.8%
-11.8%
S millions. 1989
Value of
Shipments
32,574.0
29,719.0
33,782.2
31,550.2
29,151.9
17,473.2
36,915.9
37,852.5
32,405.1
28,227.3
constant
Value
Added
15,505.9
13,651.6
15,706.8
14,220.9
13,668.7
8,363.9
17,350.6
17,118.7
14,507.8
12,517.6
Growth Rate. $ constant
Value of
Shipments
-13.3%
-8.8%
13.7%
-6.6%
-7.6%
-40.1%
111.3%
2.5%
-14.4%
-12.9%
Value
Added
-19.3%
-12.0%
15.1%
-9.5%
-3.9%
-38.8%
107.4%
-1.3%
-15.3%
-13 7%
Source: Department of Commerce
Employment fell 26.9 percent from 1982 to 1986 (see Table 5.7-2). However, some of these lost jobs
were regained in subsequent years before falling to 218,900 in 1991,19.6 percent below the 1982 level.
5.74
-------
Table 5.7-2. Employment and Productivity
All Employees,
Year thousands
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
272.2
232.0
230.5
218.1
199.0
220.2
232.4
236.9
236.8
218 8
Production Hours,
millions
310.0
268.0
295.2
275.0
253.9
290.3
315.1
323.2
318.1
283.1
Real Value
Added/Hour
50.0
50.9
53.2
51.7
53.8
28.8
55.1
53.0
45.6
44.2
Growth Rate
Year
1982-91
1983
1984
1985
1986
1987
1988
1989
1990
1991
All Employees
-19.6%
-14.8%
-0.6%
-5.4%
-8.8%
10.7%
5.5%
1.9%
-0.0%
-7.6%
Production Hours
-8.7%
-13.5%
10.1%
-6.8%
-7.7%
14.3%
8.5%
2.6%
-1.6%
-11.0%
Real Value
Added/Hour
-11.6%
1.8%
4.5%
-2.8%
4.1%
-46.5%
91.1%
-3.8%
-13.9%
-3.1%
Source: Department of Commerce
Labor productivity during this period reached a high of $55.10 per production hour in 1988 before falling
steeply to $44.20 per hour in 1991, 11.6 percent below labor productivity in 1982. The exceptionally low
productivity in 1987 occurred during the SIC redefinition period; the effect of measurement adjustments on 1987
data cannot be distinguished from underlying changes in production or labor utilization.
The Food and Security Act of 1985 included a requirement that farmers protect highly credible land from
erosion. This has spurred growth in conservation tillage equipment and has also contributed to the early
obsolescence of traditional farm machinery, which should also contribute to new equipment sales.
5.7.3 Effluent Discharging Facilities
The Mobile Industrial Equipment sector includes an estimated 764 effluent dischargers, accounting for
approximately 7 percent of MP&M facilities that discharge water and earning an average of $65.9 billion in
5.75
-------
annual revenue during the period of 1987 to 1989, in 1989 constant dollars. These Mobile Industrial Equipment
facilities, however, account for 9 percent of employment and over 13 percent of revenues from Phase I MP&M
dischargers, implying that Mobile Industrial Equipment facilities are relatively large, compared to facilities in
other sectors.
Within the Mobile Industrial Equipment sector, dischargers earn an estimated 100 percent of all revenues
earned in the sector. Due to the small sample size, this value, called the regulatory coverage ratio, is subject to
substantial uncertainty. However, the cost pass-through elasticities are multiplied by the regulatory coverage ratio
of 1 to account for the best estimate that there is no cost pass-through attenuation due same-sector competitors
not subject to regulation.
Facilities in small businesses, as defined later in this chapter, comprise 36 percent of all facilities in the
Mobile Industrial Equipment sector but employ only 11 percent of production and non-production employees
within the sector.
Facilities classified in the Mobile Industrial Equipment sector earn 97 percent of their revenues from
sales in their sector. Revenues are dominated by sales to domestic non-governmental customers, which generate
84 percent of Mobile Industrial Equipment sector revenues. An additional 15 percent derive from exports, with
the remaining 1 percent credited to government sales.
Table 5.7-3. National Estimates of Effluent Dischargers in the Mobile Industrial Equipment
Sector
# of Faculties % of Total
All Mobile Industrial Equipment
Small Business Owned Facilities
Not Small
Indirect Dischargers
Direct Dischargers
764
273
491
670
94
100%
36%
64%
88%
12%
Employment
274,781
29,266
245,514
248,128
26653
% of Total
100%
11%
89%
90%
10%
Source: Environmental Protection Agency
5.7.4 International Competitive Structure
The international market occupies an important role in the Mobile Industrial Equipment sector. As
shown in Table 5.7-4, exports amounted to $11.2 million in 1991, which was almost a third of the sector's value
of shipments and well above the median export share for MP&M sectors. At the same time, manufacturers in
5.76
-------
the sector faced above-average competition from foreign sources vying for the U.S. market. Imports accounted
for 13.7 percent of total sector shipments or slightly more than the 13.2 percent median import penetration among
MP&M sectors. Thus, on both international competition counts, the Mobile Industrial Equipment sector appears
to be exposed to significant competitive pressure from foreign producers in its efforts to pass on the costs of
regulatory compliance. The Mobile Industrial Equipment sector contributed a net trade surplus to the U.S. trade
balance as exports exceeded imports by $5.5 billion in 1991.
Table 5.7-4. 1991 Import and Export Shares, $ millions
Exports
Value of Shipments
Export Share
$11,175.2 Imports
$35,525.8 Value of U.S. Shipments
Total Market
3 1 5% Import Share of Total
$5,651.1
$35,525.8
$41,176.9
13.7%
Source: Department of Commerce
Farming, construction and mining machinery industries are particularly globalized. U.S. manufacturers
face aggressive competition from Europe, Canada and Japan. The North American Free Trade Agreement is
expected to increase both imports and exports; industry observers hesitate to predict whether the net effect on
the U.S. trade balance will be positive or negative in this sector.
U.S. manufacturers are increasingly using joint ventures with foreign firms to add geographic flexibility.
An international presence gives businesses opportunities to respond to emerging product markets and to shifting
labor and other production costs. Trade negotiations have also helped manufacturers to access foreign markets
by increasing uniformity in standards.
5.7.5 Financial Condition and Performance
Operating margins, shown in Table 5.7-5, were calculated from the 1987 Census ofManufacturers by
subtracting the cost of materials and total payroll from the value of shipments. This data was available from
1982 to 1987. During most of this period, margins showed no significant pattern in fluctuating around an
arithmetic mean of 28.1 percent. However, a sharp drop in shipments, while costs continued to escalate, drove
margins sharply negative, to -38.7 percent, in 1987. This measure of margin is rather coarse and should be used
primarily to examine the time-path of production costs within this analysis.
5.77
-------
Table 5.7-S. Operating Margins, $ millions
Year
1982
1983
1984
1985
1986
1987
Value of
Shipments
32,574.0
29,719.0
33,782.2
31,550.2
29,151.9
17,473.2
Cost of
Materials
16,969.4
15,185.9
17,917.8
16,413.4
15,438.0
17,970.0
Payroll, all
employees
6,732.2
5,975.8
6,370.4
6,061.5
5,683.0
6,260 8
Operating
Margin
27.2%
28.8%
28.1%
28.8%
27.5%
-387%
Source: Department of Commerce
The capacity utilization index shown in Table 5.7-6 represents the entire manufacturing sector; it is
scaled so that 100 represents the value of the index in 1982. Except for a 1.8 percent decline in 1986,
manufacturing capacity utilization rose from 1982 to a high in 1988 of 15 percent over the 1982 level. It then
declined in 1990 and 1991 for a net increase of 7 percent over the entire period.
Table 5.7-6. Capacity Utilization and Capital Expenditures
Year
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
Capacity Utilization Index
100
103
110
110
108
111
115
115
112
107
New Capital Expenditures (millions)
$1,107.3
$705.0
$642.3
$647.4
$595.7
$822.8
$909.9
$1,082.5
$866.7
$7107
Source: Department of Commerce / Abt Associates Inc.
Capital expenditures fluctuated sharply but with a general downward tendency over the analysis period.
In the first half of the period, new capital expenditures fell by almost half from the 1982 amount of $1.1 billion
to $596 million in 1986. Subsequently, new capital expenditures increased in 1987-89, almost regaining the
1982 level, before dropping steeply once again in 1991 to $711 million.
During the survey years (1987-1989), interest coverage ratios in the Mobile Industrial Equipment sector
ranked lowest among MP&M sectors. However, by each of the other financial measures given in Table 5.7-7,
the sector performed better than the median for MP&M sectors. Its 29 percent pre-tax return on assets compares
5.78
-------
favorably to an MP&M median of 22 percent The sector's relatively low level of long-term debt (DAR of 0.42)
and current liabilities (CR of 5.21) suggests that it would have less difficulty financing capital outlays than most
other sectors, all other things being equal. Altogether, the financial measures suggest greater than average ability
to pass on the costs of compliance to customers.
Table 5.7-7. Financial Performance
Financial Measure Sector Value Phase I Median Phase I Rank
Pre-Tax Return on Assets
Interest Coverage Ratio
Debt-to- Asset Ratio
Current Ratio
29.00%
8.76
42%
5.21
22.00%
30.47
71%
2.64
2
7
2
2
Source: Environmental Protection Agency
5.7.6 Industry Structure and Competitiveness
Of 3,773s establishments in the Mobile Industrial Equipment sector, 45 percent have fewer than 10
employees. Table 5.7-8 shows the value of shipments accounted for by establishments of various size categories.
Most output comes from large establishments. About half of the sector's value of shipments comes from
establishments with 500 or more
employees, which constitute less than
1 percent of all establishments. The
Small Business Administration's
small business threshold averages
636 employees at the firm level6.
Distribution of Shipments by Size
MP&M Sector 7: Mobile Ind. Eq.
$10,000 i—
$8,000
$6,000
O
u
3
ss
a\
$4,000 -
$2,000
Ito4 20to49 250to499
Establishment Size, # of Employees
2500 +
1987 Census of Manufacturers, Department of Commerce
6The Small Business Administration defines a small business as a firm with fewer than 636 employees, where this
threshold is a calculated as a shipments-weighted average of small business thresholds for each 4-digit industry in Sector
7 Mobile Industrial Equipment. The SBA threshold is given in terms of firm-level employment, though, and are therefore
not directly comparable to facility employment values given here.
5.79
-------
Table 5.7-8. Distribution of Shipments
Size, by
Employment
Ito4
5 to 9
10tol9
20 to 49
50 to 99
100 to 249
250 to 499
500 to 999
1000 to 2499
2500 +
Shipments,
millions, 1987
$190.3
$414.2
$875.2
$2,007.3
$2,061.7
$4,436.7
$5,074.2
$6,492.1
$9,851.0
$0.0
Number of
Establishments
1,034
656
700
664
294
261
93
45
16
10
Cumulative Percentages in Sector
Shipments,
1987
0.6%
1.9%
4.7%
11.1%
17.7%
31.8%
48.0%
68.6%
100.0%
100 0%
Number of
Establishments
27.4%
44.8%
63.3%
80.9%
88.7%
95.7%
98.1%
99.3%
99.7%
100 0%
Source: Department of Commerce
Table 5.7-9 shows that establishments with 1000 to 2499 employees form the largest cohort in this
sector, whether measured by total employment or by output. This cohort also generates disproportionately more
new capital expenditures, while smaller establishments spend less on new capital per employee or per unit of
output
5.80
-------
Table 5.7-9. Value Added and New Capital Expenditures by Employee Size, $ millions
Size, by
Number of
Employment Employees, OOOs
Ito4
5 to 9
10 to 19
20 to 49
50 to 99
100 to 249
250 to 499
500 to 999
1000 to 2499
2500 +
All Sizes
Cumulative Percentages
Size, by
Employment
1 to 4
5 to 9
10 to 19
20 to 49
50 to 99
100 to 249
250 to 499
500 to 999
1000 to 2499
2500 +
2.1
4.5
9.7
20.8
20.8
38.7
35.1
36.5
52.3
0.0
220.5
in Sector
Number of
Employees
1.0%
3.0%
7.4%
16.8%
26.3%
43.8%
59.7%
76.3%
100.0%
100.0%
Value Added,
millions
$91.3
$202.4
$443.0
$972.2
$975.6
$1,993.6
$2,089.9
$2,803.5
$4,882.7
$0.0
$14,454.2
Value Added
0.6%
2.0%
5.1%
11.8%
18.6%
32.4%
46.8%
66.2%
100.0%
100.0%
New Capital
Exp., millions
$3.1
$6.6
$14.7
$33.2
$35.3
$90.3
$112.3
$135.2
$337.6
$0.0
$768.3
New Capital
Expenditures
0.4%
1.3%
3.2%
7.5%
12.1%
23.8%
38.5%
56.1%
100.0%
100.0%
Number of
Establishments
1,034
656
700
664
294
261
93
45
16
10
3,773
Number of
Establishments
27.4%
44.8%
63.3%
80.9%
88.7%
95.7%
98.1%
99.3%
99.7%
100.0%
Source: Department of Commerce
The extent of horizontal and vertical integration in the Mobile Industrial Equipment sector suggests
average compliance cost pass-through potential. The eight largest firms in each Mobile Industrial Equipment
industry produce an average of 55.9 percent of that industry's output, which is below the median eight-firm
concentration ratio among MP&M sectors. Thus, the horizontal concentration measure indicates a diminished
ability to pass on compliance costs to customers. At the same time, the industry is more diverse than the average
MP&M sector. Its specialization ratio of 75 percent is below the median value of 88 percent for all MP&M
sectors. Thus, the possibility of vertical integration is higher than for the average sector, and the horizontal and
vertical integration factor offset each other.
On the other extreme, the smallest establishments generate less than a proportionate share of output,
employment and new capital expenditures. Table 5.7-10 examines establishments with fewer than 9 employees.
5.81
-------
These establishments comprise 44.8 percent of all Mobile Industrial Equipment establishments; they generate
1.9 percent of shipments, 1.3 percent of new capital expenditures and 3.0 percent of employment (6,600
employees) in this sector.
Table S.7-10. Smallest Businesses (Establishments with fewer than 10 employees)
All Sector Smallest Businesses Smallest Business Share
# of Facilities
Shipments, $ millions
Value Added, $ millions
Employees, thousands
New Capital Expenditures, $ millions
3,773.0
31,402.7
14,454.2
220.5
768.3
1,690.0
604.5
293.7
6.6
97
44.8%
1.9%
2.0%
3.0%
1 3%
Source: Department of Commerce
The major customer groups for this sector are somewhat atomistic homeowners, farmers, and
construction and mining enterprises. Natural forces play a heightened role in shaping markets in this sector.
Weather measurably influences construction activity, as well as home lawn and garden equipment sales. Lack
of new land to farm limits purchases of new farm equipment, except for replacements. Mines have intrinsically
limited abilities to increase output, and large stockpiles of leading mine products, such as coal, buffer the need
for changes in production in the near term. Sales to government earn only 1.4 percent of this sector's revenues,
while exports add another 14.7 percent.
5.7.7 Structurally Derived Cost Pass-Through Ability
Compared to most MP&M sectors, the Mobile Industrial Equipment sector is more integrated vertically
than the median MP&M sector, as indicated on Table 5.7-11. However, the sector's horizontal concentration ratio
is below the MP&M median. Thus, market structure considerations assign a value of zero for expected cost pass-
through potential. However, this sector's high reliance on export markets and relatively high degree of import
penetration both assign negative scores to the sector. The sector's low average annual growth in real value added
of -2.0 percent is less than the median, canceling the positive contribution of the sector's high PTRA of 29
percent, leaving the Mobile Industrial Equipment sector a net score of-2.
5.82
-------
Table 5.7-1 1. Structural Measures
of Cost Pass-Through Capability
Sector Value MP&M Median Points
Concentration Ratio, 8-firm
Specialization Ratio
Import Penetration, %
Export Share, %
Growth Rate, %
Pre-Tax Return on Assets, %
Total Points:
55.9
75.0
13.7
31.5
-2.0
29.0
57.7
84.0
13.2
18.3
-0.6
22
-1
1
-1
-1
-1
1
-2
Source: Abt Associates Inc.
5.83
-------
-------
Appendix A
§308 Survey (Economic and Financial Component)
This appendix contains a data dictionary and a reproduction of the economic and financial
component (VI) of the 1989 Machinery Manufacturing and Rebuilding Data Collection Portfolio (the Section
308 Survey).
A.4
-------
-------
1.0 INTRODUCTION
In 1991, under the authority of Section 308 of the Clean Water Act, the U.S.
Environmental Protection Agency (EPA) sent 1,020 questionnaires to machinery manufacturing,
rebuilding and maintenance companies that had previously participated in a "mini" data
collection information questionnaire. The questionnaire, entitled "Machinery Manufacturing,
Rebuilding and Maintenance Survey,"1 consisted of six sections: 1) Part 1: General Information;
2) Part 2: Process Information; 3) Part 3: Water Supply; 4) Part 4: Wastewater Treatment and
Discharge; 5) Part 5: Process and Hazardous Wastes; and 6) Part 6: Financial and Economic
Data. This data dictionary and final release of the data set is for Part VI (Financial and
Economic Information) of the Metal Products & Machinery (MP&M) Data Collection Portfolio.
2.0 DOCUMENTATION
Part VI of the data collection portfolio (DCP), requests facilities to provide substantial
financial information at the facility level and general information at the firm level (if applicable).
Data from Part VI of the questionnaires were reviewed, entered into an electronic database, and
converted to a SAS data set. A computerized SAS "check" program was created to run and
check the data for consistency and mathematical accuracy. Any problems with the data were
addressed with the facility and documented in written correspondence. Upon receipt of
verification of data additions/changes, the updated information was entered into the SAS data
set. .All information in the data set should be treated in accordance with Confidential Business
Information Requirements and only individuals with an Office of Water Confidential Business
Information (CBI) clearance from the EPA Document Control Officer (DCO) may have access
to the data.
2.1 Database Dictionary
The final official version of the data set is labeled MPMP6VO2.SSD (MP&M Part VI,
Version 02). It has 780 observations, 743 which are clean, and contains 257 variables. This
dictionary contains the SAS variable names, the page and question numbers, and the length and
type of SAS variables. Also included in the database dictionary is a copy of Part VI of the
questionnaire annotated with the SAS variable names. Data for DCP questions 13, 17 and
Section 3 have been removed from the data set as further protection of data confidentiality. In
reviewing or using the data set, you will encounter flag variables and other values which are
documentated in sections 2.2 thru 2.6.
2.2 Missing values
Missing values are indicated by a dot (.), and represent values that were not provided
for that particular entry. Missing values should not generally be interpreted as zero. Rather,
1 The data collection protfolio (DCP) process, originally entitled Machinery Manufacturing, Rebuilding and
Maintenance Survey was changed to Metal Products and Machinery (MP&M) Survey.
MP&M Data Dictionary
September 21, 1993
Abt Associates Inc.
-------
the respondent chose not to provide or could not provide a value for the variable in question.
In some cases, particularly on the income statement, a missing value means that the variable has
a value but is contained in another entry. For example, many respondents chose to not provide
a value for either other costs or other expenses. In these cases, the missing value is in fact
probably not zero but is included in another cost category.
2.3 N & U
These character values may appear in the data set and should be treated similarly to
missing values. Strictly speaking, //means that an respondent determined that the question does
not apply to the facility and U means that the response is unknown and cannot be provided.
SAS recognizes these values as the numeric values .N and . U. Very few entries contain an N
and U.
2.4 Zero
Zero values found throughout the data set should be interpreted as zero. They are the
specific values given by the respondent.
2.5 Flag Variables
Several flag variables are listed at the end of the data dictionary. The flag variables are
important because they may alter the interpretation of data contained in another variable. For
example, if YRFLAG1 is given a value other than a dot (i.e. missing), then the income
statement data reported for 1987 has a special condition. To illustrate, if YRFLAG1 = 1, then
all of the 1987 data is missing because the facility could not provide 1987 data (usually because
the facility was not in business in 1987 or operated under different accounting rules). If
YRFLAG1 = 88, then all of the data on the income statement reported for 1987 is actually 1988
data.
2.6 Dollar Entries
All dollar values in the data set are in thousands of dollars.
MP&M Data Dictionaiy
September 21, 1993
Abt Associates Inc.
-------
CQ
0
Q
0
>>
^
00
i
|
1 *
1
1
u —
— .c
> J
A C
sl if
>3Ll«
e
o
*«3
CO 0-
•«£ es §
CO > J
z
S*
IS
1"*
CO CM
1
ON_
1
ON
*
00
1
Z
Q
CU
u
9
'c
s
0
Z
•5
,
i
ON
O\
ON"
ON
ON"
ON
O
OO
Z
o)
revenu
ON
oo
ON
0.
U
9
s
o:
<
£
(
'
ON
ON
ON
ON"
ON
ON
ON"
ON
OO
cs
00
1
Z
c
o:
S
Q
i i
— 00
Cfl VI
B £
13 U
^ ^
— fS
ts
r~
?i
cs
00
E
3
-
§>
~
O
1^
o
8
VI
B
O
•8
en
s
.u
u
_3
"3
>
S c
oo E
•« £
^ TE
8
C3
CU
,
'
ON
ON
ON
ON
ON
ON
ts
00
1
Z
VI
§,
1
*o
1
V^M
CU
u
9
'c
i
Q.
E
uU
£
Z
t
t
ON
ON
ON"
ON
ON"
ON
NO
OO
Z
2
'S
03
o
oa
,
1
cs
1
TJ-
oo
1
Z
1
S
CO
U,
1
^
5
<
NO
00
,
1
rj
—
s?
oo
E
Z
4=
1
t3
s
tu
1
a
S3
CO
NO
OO
1
1
ON
ON"
ON"
ON
O
NO
00
Z
i
1
1
1
oo
a»
oo
H
1
dill
1
1
|
ON"
ON
ON
of
OO
NO
00
1
Z
I
£
1
00
§
oo
00
H
-3li
~ -S 1 i
ex E- — 5)
...
S
o
o
cd
I
o
ffi
o
en
•
CO
-------
o
3
a
"3
.0
52 "B
< o
CO Oi
85
8
VO
a\
Os
OS
OS
of
TJ-
CO
os
OS
Os"
o\
OS
Os"
OS
(S
Os
os
OS
OS*
OS
OS
a
8
o\
a
Os"
OS
OS
CO
o
o
OS
OS
OS
8
OS*
OS
OS
of
CO
00
Q
I
DO
OQ >
1
1
Z
E
3
z
1
E
Z
1
Z
I
Z
JD
IE
(D
o
3
•o
H
a.
•a
§
CO
OS
o
o
O
.o
ca
t-
co
os
B
O
O
OS
2
I
1
1
tC
§
I
eo
CO
H
5
CO
m
P
CO
Q
CO
tu
to CX
— 41
5IJJ
. JJ 1 1
« -S 8 S
CXH JS «
.il
OH >S M
-S S s
cs 3 g •=
£ ^
^f£?
S
S
-------
^t
cS
O
O
S
o
£
VI
I
^
F-*
t*
CO
p-
13
w
ll if
> !i§
e
o
< 'i
en a.
•S
en • °o
^I ^ u
en > J
en c S.
£>£"
is
J2
1/1 "^ §
£ 4k
en CX
""=**
1^
gs-
gs-
OS
4J
•o
1
"1
a
1
t—
00
p-
oo
g
« 1 1
OH £ «
.«
t
1
a
Os
Os
O
"™
OO
E
3
Z
1987 interest
oo
X
« 1 i
1 « Q j
6i2| I
S
Os
Os
Os
Os
OS
Os
OO
•KM
00
5
X
3
i
o
o
c
"3
o
—
o
to
1
p-
OO
Os
00
p
^.ill
61 £-"
S
Os
Os
Os
Os
Os
Os
$
so
>n
""
00
e
3
Z
Ul
«
1
X
o
5
Os
I
O
oo
_
— 0 «
, ° 6 i
Of2 £ i
S
i
Os
Os
Os
Os
Os
Os
Os
Os
so
OO
Z
i
O.
x
o
T3
§
tn
1
o
oo
p
**
— u 1
OH £ «
8
O\
Os
Os
Os
Os
Os
Os
Os
t-
00
E
3
en
"w
O
O
13
-S
S
d.
T3
1988 materials an
oo
oo
S S
«f 11
ot25 «
S
i
Os
Os
OS
Os
Os
OS
Os
Os
O
oo
oo
E
Z
Cfl
1
o
oo
§
00
oo
OQ
p
€
^1 1 1
g
-------
1
11
fr
s
.2
o
3
ICw
Q
(U
fc
CO
jg
g
^
tr*
i
1
11
1
U —
13
cd c
11 if
>s?^
<:1
CO CU
CO ' a
w > >4
OT > H*
U
15
13
U
•S 8
111
fr
c3a
0*.^
s ei
CO 0)
!
ON
ON"
ON
a
a
1
oo
1
2
o
-
£«
o
o
-------
03
O
O
5
o
>-4
co > H
ja
ll
ill
to O*
Is
1
1
ON
ON
ON
a
i-
00
1
Z
en
o
en
B
O
D.
X
eg
00
OO
ON
1
O
00
oo
G
4) S
5?J5
S
i
1
ON
O\
ON
cs
ts
oo
1
z
en
o
B
O.
X
•a
S
en
1
u
60
oo
I
00
s
— iD
s
1
1
a
ON
a
1
00
3
Z
o
u
o
•o
s
Q.
materials and
ON
oo
ON
P
« 1
4S1I
8
i
i
1
ON
ON
ON
ON
ON
00
00
E
a
en
t*
O
•s
ON
oo
O\
ON
00
BQ
P
- 1
«N 3 g
CXH £ «
8
1
1
Os
CTv
1
a
VO
tN
00
s
Z
tM
o
?
A
costs of contr
2
ON
OO
U
*il-
CXH £ «
S
t
1
ON
ON
ON
ON
a
ON
ON
OO
cs
oo
1
Z
en
§
U
1
a
i
o
1
» E
«N 3 g •
6-H-S!
8
1
I
1
O\
O\
ON
g
00
3
Z
|
"3
1
o.
U
•o
ON
00
O\
ON
oo ,
tu
P
1
S2li
s
-------
I]
II
&»
II c
1 «J-
Q
S
II '"">
i
00
|| j ,
II *§
11 ^t
11 f\
|i| £2
•e
P?
3 J
5 B
— .S
1- If
£^>*2.
<1
CO Of
•S
<£ *3 as
CO > J2
M s &
CO > P
1 1
u
is «>
co -c S
$>£
&
tfj O*
^=«t
3 BO
CO O,
1
ON
0\
1
o\
s
CO
CO
1
z
s
O
X
c:
ON
co
ON
Ui
u
1
1
pj
c
7 I i
SglJ
s
i
s
ON
%
CO
O
CO
CO
1
z
c
u
E
§•
•S
1
1
CO
ON
ON
CO
0
p
a
— 0 «J
Sill
8
i
1
ON
ON
1
S
VO
CO
CO
s
z
1989 interest
CO
p
3
711
sill
s
1
1
ON
ON
ON
ON
CO
CO
3
X
3
2
E
o
g
••••
cd
J
-------
^
ea
O
0
5
Q
o*
^
C/3
eu
S
•e
— "^
>3
— .5
>!1«
c
o
*2 '«
J3
ill
e>
3
1!
4)
•g o
c/3 -c E
&
& %
(S O
^*fc
3£>
j
IS
8
c
es
r-
CT
oo
£
1
o
c
u
1
o
T3
1
1
Q
P
o
3
£
S
i
i
i
ON
ON"
ON
ON
ON
o
tn
CO
|
2
Aircraft MMR revenues
-C
P
O
£
OS
1
1
R
6
00
00
oo
I
1
0
1
2
'3
CQ
P
o
xi
£
SI
i
S
o
ON
00
£
2
1
o
n.
1
"3
B
cu
u
8
u
2
£
SI
i
IS
S
6
s
00
£
1
o
.—
"I
o
•o
1
2
"3
Q
P
u
3
*-
s
i
ON
ON"
S
2
00
2
w
u
Electronic equipment MMR revenu
<
P
ts
u
3
£
S
1
IS
o
S
00
E
1
0
o
!
~o
ca
P
cs
u
3
£
SI
i
i
t
8
6
oo
00
E
2
1
1
g
1
cu
U
P
rs
o
XI
£
o
i
8
0
NO
en
00
2
PCT electronic domestic (non-govt
O
P
rs
«j
3
H
S
}
ON
ON
ON
Tf
•
"a
H
SI
1
1
I
o
1
00
|
2
"8
•c
o
r
.£•
1
rt
1
U
p
p<
u
XI
H
SI
i
I
o
oo
00
1
2
0
c
o
."
"M
O
T3
CL
1
!
1
in
o
CH
Q
P
«s
o
"a
H
SI
i
ON
ON"
ON
ON
ON
ON
NO
Sf
00
£
Z
\ Ordinance MMR revenues
P
ts
o
XI
H
cs
ON
1
1
^
0
CO
00
1
z
•fc-t
1
0
8
j
cu
ca
P
fS
o
X
H
SI
i
IS
8
o
SI
oo
E
Z
\ PCT ordinance exported
O
P
«s
o
X
H
SI
!
I
O
8
00
1
2
/^\
| PCT ordinance domestic (non-gov
O
P
cs
o
•5
H
s?
I
I
OS
1
ON
ON
§
00
£
Z
\ Aerospace MMR revenues
<
p
-------
o .22
.2.8
to a
> 3
u
•S ^*
JI|f
>sg^
e
,2
n
00
1
jile equip exported
1
1
S
o
Tf
OO
g
2
g
60
e
u
1
•8
a,
I
jj
"~
i
o\
O\
ON
£
g
00
1
nt MMR revenues
1
1
6?
R
o
o
oo
oo
g
2
1
2
S
I
§
o
00
oo
00
g
2
1
1
i
!
IS
S
o
VO
oo
g
2
^
i
C2
rument domestic (no
i
i
i
0,
Q\
sf
o\
o
VO
00
E
2
(*
1
1
1
1
§
o
S
00
g
4_l
o
60
:ious/non-precious to
I
§
o
vo
00
g
n
QJ
8,
:ious/non-precious e>
i
S
6
oo
VO
00
g
o
•s
:ious/non-precious dc
0
r
i
€ft
8f
ON
ON
vo
VO
00
g
2
R revenues
i
S
s
vo
00
g
1
2
g
a.
1^
o g
li
a.
tJ
a.
03 -c S
ssll
a\
ea
Os
Q
g
BQ
es
o
i
I
c«
o
r*
o
I
«s
I
S
1
fr
£^
^«£?
S
S!
SI
SI
-------
cS
O
ts
S
rt
0
u
e
^3
VI
|
ts
fi
ai —
II
Ui
liif
"* TS IS §.
e
o
3*1
co fiu
».l
co > J
l£l
..s
JO
so ^ 2
g^»
is
to c?
i
1
t
S
0
n
SO
00
2
PCT ship exported
U
P
CS
i§
8
i
S
6
0
SO
oo
1
f
oo
1
c
"t?
I
c
c
Ic
en
CU
D
P
IE
(S
ON
i
Os
Os
1
O-
OS
OO t
SO
00
1
2
s
Household equipment MMR rev
<
P
4i
jE
8
1
s
6
SO
so
oo
e
2
PCT household to govt
CO
P
ts
u
1
8
i
S
o
00
SO
OO
2
PCT household exported
0
P
-------
1
II
II
II
II
1
II
1 m
1 -2
5
II -2
1 Q
1 "**
II r*
3
OQ
I Jg
i] ^)
°"
11 f**^
II "I-*
1
I
H
> »J
U
03 C
W "Q m /— %
> Zl2 1£
G
_£
< C
co cu
co ^1
CO > J2
OT c y
2>P
o
is
13
.a
co *n E
eo > 2
j>
C *fe
£a
= eb
CO CU
ON
§
ON
ON
ON
ON
NO
00
E
•z
a
C*
1
Office machine MMR
£
ON
1
ON
ON
ON
ON
ON
ON
ON
CO
00
E
2
Non-MMR revenues
r*-
£
e*
o
o
£
fS
ON
1 *!
Ii 3 J
Hi Hi
I! 11 11 11 II
-
i
CO
E
3
BO
•c
3
I
3
§
Describes "other" non
revenue sources
I
r--
£
«s
o
o
£
8
1 JJ |
K 3 i
Hi Hi
ii u n ii u
2
00
00
E
•z
60
c
3
«i
3
i
Describes "other" non
revenue sources
1
r—
M
cs
4)
"
£
ON
i 5 i
K 3 J
III II .
n ii ii ii ii ii
vo
t
1
00
E
BO
e
2
J
1
Describes "other" non
revenue sources
1
d
-------
03
0
o
3
CTS
G
(U
3
CO
1
•c
fi
|l
u
.2 c
al 8S
— — s X
> Z > S-
(3
O
3'i
en Cu
rS
CO L> C
< « s
1/3 > J
ill
I2
J
c/i »r* P
^>l
fe*
£%
^a
&^_
OT txf
1— property rental
2= services
3= interest
4= property sales
5= legal settlement
6= other
\O
~
^^
O\
S
oo
E
3
Z
"other" non-manufacturing
urces
en ta
Si
"E §
ta ^
g
O
U
t—
P
(U
H5
£
g
l=pn»pcrty rental
2= service*
3 = intereil
4 = property sale*
5 = legal Kttlemcnl
6=othrt
VO
i
l_
O
(S
00
E
3
Z
"other" non-manufacturing
urces
o o
11
Q 2
•*
E
a
r**
P
-0
H
S
'o
1= integral part of
facility's operation
2 = non-Integral purt
facility's operation
O
— '
^M
OO
a
00
E
Z
"other non manufacturing
dependence on main
ring revenues
Describes
revenues"
manufactu
CD
^
P
N
0
•§
H
8
o
1= integral part of
facility's operation
2=non-inicgral purt
facility's operation
Ui
O
*~"
Os
00
a
00
1
Z
"other non manufacturing
dependence on main
ring revenues
Describes
revenues"
manufactu
CQ
^
C
p,
o
•§
H
g
"3
1 = integral part of
facility's operation
2=non-inlegral part
facility's operation
n
o
™ *
t**-
?3
00
I
z
"other non manufacturing
dependence on main
ring revenues
Describes
revenues"
manufactu
03
*MM
P
N
4>
•a
H
S
j
£&
8
0
oo
oo
1
ware manufacturing
•2
JS
<
*-*
V
-------
fr
to
e
.1
s
0
o*
c
C/3
%H
•e
o JS
3 «
*ra "a
ilsf
*8 T3 f£ gg
> u_ > s_
e
_o
< 8
CO CU
rS
^2 £? '•*
co > >J
co • S.
3>fP
1,
ll
> J
0
CO •§ |
co J> 2
o
is
h
i
i
o
1
CO
£
3
hardware rebuilding
o
Cw
ca
P
en
o
1
S
1
I
1
I
0
CO
CO
CO
g
*
hardware maintenance
Q
Cm
U
P
en
o
1
S
I
1
1
1
0
VO
r-
co
CO
E
3
aircraft manufacturing
u
Cw
<
P
en
o
1
g>
1
I
o
Tf-
CO
CO
00
E
3
"5
1
I
o
§
00
E
3
2
00
•o
^T?
3
cu
1
1
£•
1
S
VI
ft
0.
CO
P
en
o
1
S
1
I
o
a\
00
E
3
U
S
S?
.&
I*
1
I
ITJ
0.
U
P
en
u
1
Si
1
t
1
I
o
CO
00
E
s
on
ordinance manufacturin
ft
cu
<
P
tn
0
1
a
i
1
o
c5
00
E
2
ordinance rebuilding
n
cu
•n
P
tn
u
1
a
i
I
o
VO
00
E
3
z
o
o
.E
8
1
o
ft
cu
u
in
P
en
o
S
a
i
i
i
1
0
r-
00
E
3
an
aerospace manufacturin
ft
0,
<
P
en
o
"§
a
i
I
o
o
CO
CO
E
21
aerospace rebuilding
fl
0,
CQ
VO
P
tn
o
S
a
i
I
o
CO
CO
o\
CO
E
2
aerospace maintenance
ft
0,
u
VO
P
tn
u
t
s
1
1
1
I
o
VO
CO
E
3
eo
c
•r-
R
0
1
a.
I
^
JO
IS
^
a.
r-
P
en
o
"§
a
-------
co
.1
o
5
0
>%
S
CO
%
CU
S
-c
o ~
•5 4)
33
V.
— _S
|1 |f
> llts
e
o
< '§
en cu
rS
CO C B
< • i-J
III1
—
•| J
> J2
_«
"a S
co -c E
co > Z
s*
£ =**=
^ a
& *=
I
8
6
|
00
1
Z
OO
c
1
.£•
1
•o
15
i
cu
03
t-
P
en
u
.0
f^
S
i
0
S
o
es
0
00
1
Z
n>
u
c3
1 equip mainten
•o
15
S
a.
U
t—
P
en
u
.0
£
ON
|
0
8
6
1
oo
E
3
manufacturing
instrument
H
a.
s
S
o
00
0
OO
e
z
1
1
3
.£•
^
0.
0
p
en
.
"§
H
*
1
1
1
^
8
o
es
oo
Z
aintenance
&
1
£
u.
es
P
en
o
"S
H
ON
-------
II
If
II
£»
.2
o
3
.2
>v
U
II CM
CO
II "*
li ?*
1
J3 j£
& es
_es c
(A "r5 x^
— — J §
> S > ts.
e
o
<1
Hi
2£j
ill
o
•8 —
13
u
wig
££*
fe*
15
Is
fcR
S
o
§
00
E
2
anufacturing
E
u
o
1
w
CU
en
P
en
o
S
S
fes
8
cc
00
E
2
oo
is
"3
.O
a
u
o
1
S
cu
CO
en
P
en
u
is
g
^^
8
VO
ij
u
•o
§
01
G
cu
CQ
P
en
o
1
5
1
1
£S
8
o
cc
00
E
2
lintenance
F
•a
§
3
g
U
•<*•
P
en
o
S
en
,
1
££5
S
o
oo
oo
00
2
hf
lanufacturinj
e
e
1
ts
g
5S
P
en
U
E
o
cu
09
P
en
u
1
g
,
1
>Jf3
8
o
§
00
g
2
laintenance
s
u
s
1
u
i
g
U
P
en
u
2
g
t
•
t£
8
o
es
00
g
2
ufacturing
S
OS
S
1
o"
B
cu
VO
P
en
u
1
g
1
1
v£
8
6
S
oo
g
2
00
is
3
2
Cd
J=
o
CQ
VO
P
O
1
a
,
1
>ja
8
o
00
es
00
g
2
Itenance
E
o
O
VO
P
en
u
g
o
es
oo
I
3
e
o
i
u
3
S
0 JO
O
-------
fr
o
o
3
tw
S
<#
a.
S
s
^05
"w "§
> -S
u.
53 fi
il 'if
>sf 1
d
o
< 0
co o.
oo U I1
•< « u
CO > J
oo u g.
M > £
0
ll
1 g
oo -c E
oo > Z
£ *
oo CX
|j
i
i
Os
OS
Os
Os"
•*
CS
"-
oo
1
z
1
1
I
e
oo
00
00
oo
^-
JJ g -
,.Q _ 1
H M 5
SO
OS
,
1
Os
OS
OS
Os
OS
CS
CS
•"*
oo
1
z
.§
2
1
oo
T»-
E-
^ O
w e *•
-o .2 «
H 03 0]
SO
,
t
OS
a
OS
OS
eg
CS
™*—
CIO
S
z
cn
1
£
i
u
1
'o
1
r-
S
•*
H
ll 1
£££
SO
OS
i
i
0\
Os
O\
Os
00
CS
~"
00
1
z
cn
I
3
i
3
u
"o
oo
00
oo
l"
•4- «
^ t>
« c —
i-31
6- CO 50
S
t
1
1
Os
Cs
Os
Os
Os
so
r—
oo
1
Z
1
cn
S3
1
u
i
'o
Os
S
Os
oo
H
TF •>
HM w
S
,
1
1
Os
Os
OS
Tf
00
ts
00
1
z
in
1
1
2
t-
§
oo
f>
H
TT •»
u a —
J> £ •
H ffl ca
SO
Os
Os
S
OS
a
Os
OS
S
CS
oo
z
en
1
2
oo
§
00
oo
H
"* 8
o e *
I-S js
H
oo
1
z
*
cn
cn
ca
i
3
2
OS
oo
Cs
oo
f>
•* 8
ll«
H a> so
,
1
t
'
g^
Os
Os
Os
Os
OO
0
CO
00
z
cn
u
1
1
'8
o •
1
5
rr
*8
2 — <
H a» to
«
-------
II
II
(•*
g
.2
CJ
s
1
s
II ^^
i
II ^
3
IJ CUi
li ^3
S
II *^^
II i1 *
II «
1 ^
I
«j »£
1 ^
ta B
1-li
>J2,gtS
B
_a
CO *fi
< J
CO O*
€
co • a
CO > J
ill
JU
11
o
•i o
co > Z
X
1*
£ o
£=*
r2 r?0
CO CU
1
Os
Os
°1
oT
8
so
cn
oo
Z
CO
tn
s
1
fc
3
U
§
1
OO
CO
Os
CO
00
I
1 §1
g
1
1
Os
Os
oC
oT
Os
ts
cn
00
e
3
tn
M
S
1
fc
3
§
O
B
a
0
1
1
o
IP
H CQ «
VO
o\
t
I
1
Os
OS
OS
Os"
OS
CN
OO
Z
tn
1
'a
§
i
o
B
1
, .
e
g
u
1
00
Os
00
— £ u
J3 ^ S
£££
s
1
'
Os
OS
OS
Os"
OS
OS
Os"
OS
tn
00
S
3
vt
H
"a
1
o
B
•O
§
•^
B
g
§
3
2
00
oo
oo
iii
£££
VO
o\
1
1
1
a
Os
Os"
OS
OS
Os"
Os
00
cn
oo
|
^«
^S
CO
•&
e
3
o
B
O
B
1
g;
g
3
U
1
Os
Os
00
in
|||
VO
ON
t
1
i
s
OS
gf
SO
tn
00
I
8
"•C
•5
1
^
a
g
g
0
i
1
•* 8
111
Haw
S
,
1
OS
OS
OS
oC
Os"
OS
SO
tn
oo
S
Z
s
*•£*
•S3
1
C3
fc
g
1
00
oo
o\
00
oo
t> e «*
ill
s
!
i
Os
oC
as"
Os
(N
t-
tn
00
Z
*n
"«3
•5
i
B
U
3
2
Os
I
3 <5 OT
$
,
1
Os
OS
°1
°1
Os"
OS
o
oo
tn
00
S
Z
^
§
u
B
§
1
•a
§
"o
•a
g
u
ii
ll
p-
oo
•» 8
S • S
SO
as
-------
o
o
5
rt
Q
fli
1
fm+
S
QQ
pu
J§
5
•c
rt
A*
0 —
3 U
— .O
SJ
a e
ll'if
s
o
52 1
CO 0.
•S
III
ill
3 _
.52 u
* (4
"« u
fr
H« 5
NO
ON
!
ON
ON
ON
ON
ON
ON
8
1
""
ao
|
x
1
Ui
o
5
ON
P~
OO
00
s
s i :
H « «
^O
__°^____
t
i
ON
ON
ON
ON
ON
O\
ON
ON
S
OO
s •
3
Z
>,
I
l^
1
00
oo
ON
oo
oo
00
s
2 .2 !
H 03 5
\o
**
1
ON
ON
ON
ON
ON
ON
ON
ON
O
ts
•<*•
CO
c
3
Z
>,
1
b.
.1
ON
OO
ON
00
P
t!3
I -sl
f- CO «
NO
1
1
ON
ON
ON
ON
ON
ON
85
§
oo
I
§•
-a
^
—
-
g
I
2
0
t-
oo
ON
1
•» 8
t> C •
H 03 5
NO
!
ON
ON
ON
ON
ON
ON
ON
ON
NO
oo
Z
'3
•a
§
f\
.2
-
g
o
e
3
2
00
oo
ON
oo
oo
1
•* 8
111
H m «
rts
1
1
ON
ON
ON
ON
ON
ON
|
OO
1
1
i
_Q
"3
g
i
a
2
0
ON
oo
ON
1
i i«
H « «
5\
i
i
i
ON
OS
O\
1
ON
ts
00
Z
^
3
8T
1
•8
»•—
t
3
o
t
3
U
2
1
r-
oo
O
Ul
H « w
NO
ON
-------
S*
C
I -s
o
^
0
s*
>
M
1
S
^>
tJ
«
.
1
^ »— (
u.
eg c
Jilt
> i2, > tS
c
o
52 -s
< 0
•S
W u e1
< ea o
CO > >J
w ^ 8.
M > ^
U
ll
to
-g 0
2
&>
w a
is
id?
i
ON
ON
ON
ON
ON
ON
1
00
1
2
^>
3
8"
1
.s
b
O
t
3
O
C)
OO
00
ON
oo
oo
O
M «i
^^ t>
0 = 7!
S £ S
£«35
VO
ON
i
i
ON
ON
ON
ON
ON
ON
ON
ON
oo
NO
00
2
j-j»
"3
s-
•n
§
fc
c
o
c
fc
3
U
ON
OO
ON
ON
00
0
•» s
^3 — W
Hffl g
vo
o
I -iXmvatic pnxl
umc/iim p (\xlucu
2 E Foreign pnxl
3s'Nt> uompcliliiX
•t
0
—
NO
00
1
2
fcS
Local/regional ma
P
*/*>
ex
S
1 "IVmcslk: pmd
ume/flim product*
2-Forcign piwd
3s No oompelilunl
0
n-
oo
Tf
OO
1
2
National market
CQ
V)
o>
ON
l=[Xttnealic pn»d
t-une/fbn pruducu
2= Foreign pmd
3= No oompclilion
4=Doc4 nxopcn
Tf
O
ON
»•*
OO
I
2
u
International mark
U
*o
0>
t~-
ON
,
a
ON
ON
ON
8
00
1
'oo
•o
t°
1
1
i
en
CO
"8
X
(C
i
3
5
CT-
J
NO
a
oo
ON
i
ON
ON
ON
ON
ON
ON
(X.
00
1
1
TJ
§
en
OO
o
Liquidation value
CO
NO
cx
oo
ON
i
• ON
ON
ON
ON
'85
NO
OO
2
1
0
C3
C
o
Liquidation value
U
S
NO
O
oo
ON
i
8
ON
a
a
00
I
u
tg inventori
^
u
«
u
.1
"n,
01
u
00
a
I
NO
NO
o>
oo
ON
i
i
ON
ON
ON
ON
ON
ON
ON
ON
S
00
E
2
Closure costs
tn
NO
NO
0>
oo
ON
i
i
i
§;
ON
ON
§
00
1
2
Post-closure costs
NO
NO
a
£
i
i
i
*
§f
S
00
rj-
OO
E
"3
e
0
Estimated liquidati
NO
NO
O*
oo
ON
-------
1
^*»
IM
CS
O
O
5
3
1
g
00
2
1
j_.
•e
fi
§ T§
33
— .S
c
o
CO -S
< 0
CO CU
"23
f« • oo
^•3 Ui G
co > ,3
co > K
3
•P
o
_Q
m 3i
2-31
co > Z
5?
3 _,
co O
!-
3 01
CO 0.
jS
0 O o
>• Z CQ
\\ II II
en
es
SO
(n
•^
OO
z
•>,
"o
c
1
O
C
u
w
1
p
t—
6-
) 00
3 5,
11 s
3 S S.
!l II II
OS .. ..
Os Os Os Os
gC OS OS OS
„ O*^ Os Os
OS U ON OS OS
Os O Os OS Os
Tf
in
oo
E
3
z
S2
S
.5
e
u
«J
8
00
CO
"a
§
t4—
o
•£
"So
P
r-
CX
oo
ON
: '
OS
OS
Os^t-
os nn
OS i
OS <
Os" >-
OS O
es
IT)
"
OO
1
Z
•a
J
V)
03
S
13
CO
<
P
Os
a
OS
ON
i
ON
Os
-^
ON <
oC i-
Os O
0
00
00
I
z
C/l
00
is
JD
•8
VI
S
VI
J,,
3
CO
S
g
ON
a
ON
ON
1
1
ON
ON
^!T
Os_ <
Os u
Os O
OO
CO
V}
00
E
z
«c
u
•a
i
0.
"3
8"
assessed
X
u
3
co
r— ^
y,
en
P
ON
cx
S
2
« *•
« f 1
'- f- 3 S
« 1 g 2-
H-lt.3S3'«
Jl 111 I III
,i 11 ii n n^ n^ «_ g ^
Os
2^ ^^
* *
ON —
oC c
os 3
SO
OS
V"i
00
1
z
^-,
i.
•3
OT
i
s
u
3
ua
U
O
g
6
I
ON
a
S
1
2
^T
^j
rt
*C
>
U
^s
"c3
•4-*
C
*-«
C/l
en
co -a
rt ^
I— 3
11
O —
C en
.2|
1 ^
O4>rf
"B *
""" >,
j%
*^
-------
1
«
1
«
m
"
i ?•
c<
3
Part VI MP&M S
1
J J
J
Ui
-2 S
JI if
> H, > t£
g
< 0
en ou
w 4 1?
$>3
™ :> J"
u
11
JS
«!;> 2
5*
£=*
£ 0-
Is
i
ON
Q\
C\ ^.
S*
ON u
ON O
n-
o
00
3
O
"3
X!
2
3
V3
1
Q
S
ON
O>
ON
!
ON
ON
ON ^
ON <
ON i-
ON O
rj
00
a.
S
C3
>
property tax assessed
3
V3
I
P
ON
cx
3N
t
ON
ON ^.
15
S S
o
oo
£
a
1
1
1
a
X!
3
"ea
J
NO
ON
s
[
S
1
oo
NO
NC
00
1
"Z
sment percentage
£
3>
a
^
a
V3
O
H
o
a
S!
!
8
i
NC
00
£
ssment percentage
1
I
CQ
O
P
O
cy
a
S
£
i
-------
£^*
«J
o
o
5
•*i
Q
3
OO
S
1
o •—
3 0
•5 -°
>3
ja e
" £ 8 f1
c
o
2 1
CO CL
43
.- . on
< « €
co > J
,_ . u
2
co > £"
ta
1 J
J£
"2 4>
2'= §
<• o) CO
to > 2
^
>
^ .^fcj
£*=
C •
CO CU
en
1 .1
"" *- «
£1 §
3 o, S
- CJ =
< Q 8
ON
o
oo
™"
oo
1
Section 1 Comments
c
o
i
o
U
09
g
E
O
§
y t>
O ' w
"ob ~ u
— CI CO
CO
cs
i
*^
oo
E
3
U
D.
.£•
U
C
O
H
—
CX
o
S
r-
00
2
>,
.£•
1
1
O
1
H
T—
CX
!
cs
o
00
oo
1
2
1
•c
H-
E
<
H
CX
o
i
CN
O
S
00
2
43
1
U.
03
cs
H
«N
CX
0
1
CS
u
tN
E:
1
u
i
£
H
co
CX
O
t
1
.
a
U
t-
^
1
U
t/)
2
•a
•g
1
CO
CS
CO
H
CO
CX
0
1
cs
6
oo
U1
r-
o
I*
a
"3
CO
fS
CO
H
co
CX
o
1
cs
U
oo
^
U
n.
'H
1
1
E
u
CO
H
CO
CX
o
1
.
CS
6
V)
00
i
CO
1
E
CO
CO
H
cr
CX
o
<
2
II
—
oo
ON
2
2
CO
e
Q
|
ca
CO
CO
H
cr
CX
o
i
t
Os
°1
ON
ON
oC
ON
fS
r~
00
2
1 1987 firm revenues
T?
H
^
CX
.
1
o\
ON
°1
ON
ON"
1
OO
1
2
1988 firm revenues
cs
H
"*
CX
0
•8
i
2
(U
-------
',
II
11
II
II
11
II ^^
II •£<
Q
Q
II ^^
II «o
CO
II S
II <$4
It ?^
II S
II
^
1
II
II
1
a -T
es ™«
> -
u
ca c
31 8 f
111!
a
=2 -5
< 0
co cx
to c, !?
«C « u
co > 1-4
... u
co c a.
CO > £*
"
>3
o
JO ,.
ed ^
eo -c E
Z
*^
E =te
M ex
5*.^
Jo?
t
i
i
ON
0\
ON
sf
a"
CO
o
00
CO
Z
en
u
3
C
U
iS
u
J
O\
§
9
H
2;
CX
o
13
u
.|
a.
II
a.
•a o
§ 2
cu -
CO
2
a.
en
ca
1
c j c:
*"" O
t3 "c
«- o
5l
Z
II II
— «N
ts
O
ts
oo
oo
3
e>-
g
£
tc
1
a.
ca
^
JO
"8
1
1
1
I
iZ
\o
H
VO
CX
2
,
'
CO
U
o\
cs
00
E:
ea
S
u
ca
c
g
1C
c
1
^
H
r»
CX
cN
O
,
i
t
ca
U
VO
•*
oo
t—
ca
U
1
ts
g
tc
s
i
<;
r-
E-
c-
CX
o
i
t
ca
1
0
U
'o
g
«
c
i
£Q
IN
f-
r-
CX
ts
o
i
i
i
ca
U
m
t-
co
r—
ca
U
a.
"3
•o
§
3
en
g
1C
S
1
U
cs
t—
H
r-
CX
o
!
1
§
0
oo
oo
a\
ca
U
10
c
a
g
1C
es
1
<;
P
H
t-
CX
S
5
Z
II
-
<7\
oo
oo
00
1
^
Z
en
1
g
1C
e
1
02
r-
H
r~
CX
S
i g
E '1
£>!!
•s ° c
o a, S
c CJ
< Q 8
o
r~
OS
CO
00
3
en
S
O
U
a
.2
1
CO
c
u
XN
U
to
C
i
o
U
O
1
t
ca
5
1
r~
ca
.a
U
0
§
O
1
E
P
tn
c
_o
'1
CO
•rf
O
1
1
hi
ca
U
1
£
ca
6
•s
Z
S
6
£
P
tn
c
o
1
Tf
O
1)
OJO
cd
O
CO
H
.S
-------
rf^
"•J
€)Q
CU
^J.
^
r
£
1-
_o
3 0
en > Z
fr
M a
& *
3 eb
en 0-
u
c
o
•g.
3
1
U
£
P
en
c
o
'o
2
en
-a
•s
S
£
P
en
o
l/>
2
>>
firm/facili
a
£
P
en
§
£
2
1
tn
o
A
1
U
u.
en
e,
o
&
T)-
O
"3
1
U
b
en
o
£
0
Q.
1
O
1
Contac
00
a.
P
en
§
Ji
T}-
0
u
1
o
c
u
1
C/3
en
_o
£
I-
0
S2
u
"«
u
£
Q
O
S
U
o
in
• M
1
•o
en
>.
1
(4-
—
1
U
U
3
2
. Jyi
2 "^
>. "
•S
3
C3
01 00
U OO
2 2
•S £
;s a change
j statement
11
Q .S
CO
E
3
S
w ON
t. OO
2 2
** L
.S £
;s a change
z statement
11
E
2
w
IM
u
"
.s
a
1
oo
en ON
O <-
1 ^-
ca
1
S
CO
2
•=
&
1
o ^
V)
S1
1
-------
!
.2
Q
S
tt
5?
CO
£
•e
u J2
> J3
u
— .s
^ ^ ^ ^
g
<1
co a.
•S
- — • W)
to C e
< « q
eo > .-S
< j* Jt
to > H
•a |
ii
i-s
II
CO ""
oo —
OO ON
t- p
OO ON
en
IG
oo
e
3
.3
i
Ul
3
Ul
h
l» o
||
.11
i j
o 'i
1 1
CO ~"
oo —
OO ON
OO ON
rs
oo
1
S-
CO —
> CO ON
00 ON
ON
CN
00
1
z
u
i
Ul
3
S
en
£«
•s§
^ g
I
ON
CO
CO —
OO O\
OO ON
r-
t—
oo
e
3
TT
cx
en
3
vt
1
M
i
i
i
OO
oo —
OO ON
r~ p
09 ON
OO
oo
1
2
s
Ul
3
3
to
IM
CO
U
00
1
1
ON
oo
oo —
OO ON
00 ON
2
00
s
Z
*— 4
cx
.s
en
S
en
1
.s
00
i
CO
oo —
OO ON
00 ON
1
00
1
o
ex
B
Ul
3
as
.5
&
u
II
-
1
00
1
"8
1
g
is govemm
(Go-Co)
.IT'S
Ul
0
II
-
r-
oo
1
Z
8
%
"«
1
'i
.to
B-
1
ON
OO
oo" —
oo ON
00 ON
cs
CO
1
ON
a
B
Ul
Ul
1
B
0
I
o\"
00 ON
00 O\
en
en
00
i
3
o
sf
-•fi
2 8
0 g
•h
o SJ
* •§
S 8
II
•••s
S o
U
a j3
u
ca
Q <£
o
ca
§ *.
Q.S
I
u
2
%
ca
£
u.
O
E
BO
a
8?
E
S?
8?
g?
VO
QO
a
O*
3 00
CO O-i
-------
^*"*
C3
_o
o
3
RJ
O
1
c/3
I
5
I
3-5
— J3
£3
$ "5 oo ^
> Si t£
C
O
V* 'tn
< O
co o-
"5 - 1?
< « u
CO > J
,_ . U
V} t^ fi .
co > £"
—
•S ]§
_
to a
3 oh
CO CU
fl,
lJ =
w "= -3 "
1 1 -2 5 -
^3 ^ 1^ ? 5^ f
ii ll ll ii ii 2
—
M
«S
00
s
Z
en
S
a
.1!
11
u S
^3 w «
« '^ 0
f-
oo
rt
U.
,51,
c* s .s g
*" ? y u
J ^ | 5
I|-; s
i~ " "3 «
r ii 5 IT
-
§
ts
CO
c
Z
0 S «
* — 3.
_0 0 >
11 i
y >• ,Ct
J« rt "o
Hi
« ,_ -a
fill
Jill
00
00
CS
E
^
II
—
rs
-------
U.S. ENVIRONMENTAL PROTECTION AGENCY
MACHINERY HANUFACTURING AND REBUILDING SURVEY
Part VI. Financial and Economic Information
GENERAL INSTRUCTIONS
PURPOSE:
The U.S. Environmental Protection Agency is establishing wastewater effluent
limitations, guidelines and standards for Machinery Manufacturing, Rebuilding
and Maintenance activities. EPA is considering 126 priority pollutants and
other conventional pollutants for regulation. This survey collects data for
1989 on machinery manufacturing, rebuilding and maintenance activities,
wastewater treatment practices and financial and economic information for the
fiscal years ending in 1989, 1988 and 1987. These fiscal years may or may not
coincide with the calendar year.
Part VI requests information on ownership, major activities and finances for
both this facility (i.e., site as defined in the technical questionnaire) and
Che firm owning this facility. This information will be used by EPA in
assessing the economic achievability of effluent guidelines for machinery
manufacturing, rebuilding and maintenance. Specifically,.EPA needs to
determine what proportion of facilities are likely to incur significant
adverse economic and financial impacts as a result of the regulation. In
addition to determining impacts on^ehe industries a whole, the Agency will
determine if these adverse .impacts will be concentrated in a particular type
or size of facility.
Among the impact measures to be considered are changes in the facility's cash
flow due to the additional operating and capital costs that result from
compliance with the regulation. Thus, income statement and balance sheet
information for the facility are requested. Since the capital cost will be
affected by the method and cost of financing, the survey requests information
on the firm's cost of capital. Other possible impacts include the full or
partial closure of a facility or conversion to other products. Therefore, the
survey asks about the value of the plant and equipment.
ADDITIONAL SUBMISSIONS:
T-
If you feel that additional information on other facilities you operate will
allow EPA to better estimate the combined impact of the regulation on your
firm, EPA will accept voluntary submissions for all other failities that
manufacture, rebuild or maintain machinery within the company.
Voluntary submissions will be used to estimate firm level impacts, but will
not be extrapolated to estimate the effects of the regulation on the entire
industry.
To receive a blank questionnaire, please contact Ms. Sabita Rajvanshi (202)
382-7126. Do not use the questionnaire provided to this facility, as each
facility has a unique identification number.
80
-------
U.S. ENVIRONMENTAL PROTECTION AGENCY
MACHINERY MANUFACTURING AND REBUILDING SURVEY
Company Name
Site Name
AUTHORITY:
Data in this mandatory survey are collected under the authority of Section 308
of the Clean Water Act (33 U.S.C. Section 1318). Late filing or failure
otherwise to comply with these instructions may result in criminal fines,
civil penalties and other sanctions as provided by law. Provisions concerning
confidentiality of the data collected are explained below.
WHO HUST RESPOND:
Part VI of this questionnaire must be completed by every facility that filled
out Parts I through V, the technical portion, of this questionnaire. It is
imperative that information provided in Part VI include the same buildings and
activities as those considered in responding to Parts I through V. You may
need information from the technical person at your facility who is responsible
for completing Parts I through V of this questionnaire.
Part VI consists of three sections. The first section is designed to obtain
the detailed facility financial data that are needed to estimate the economic
impact measures described above. Basic information for the firm is requested
in Section 2. Frequently, the best sources of financial information are your
accountant or comptroller. In some instances, you may need to seek assistance
from your company headquarters. The facility contact must be recorded in
Section 3.
PROVISIONS REGARDING DATA CONFIDENTIALITY:
Regulations governing the confidentiality of business information are
contained in 40 CFR Part 2 Subpart B. You may assert a business
confidentiality claim covering part or all of the information you may submit,
other than »f fluent data, as described in 40 CFR 2.203(b):
"(b) Method and time of asserting business confidentiality claim.
A business which is submitting information to EPA may assert a
business confidentiality claim covering the information by placing
on (or attaching to) the information, at the time it is submitted to
EPA, a cover sheet, stamped or typed legend, or other suitable form
of notice employing language such as "trade secret," "proprietary,^
or "company confidential." Allegedly confidential portions of
otherwise non-confidential documents should be clearly identified by
the business, and may be submitted separately to facilitate
identification and handling by EPA. If the business desires
confidential treatment only until a certain date or until the
occurrence of a certain event, the notice should so state."
If no business confidentiality claim accompanies the information wh.?fl it J5
rprerved bv EPA. EPA may make the information available to the public without
further notice to you. Please mark each question or page that is claimed to
be confidential as such.
81
-------
U.S. ENVIRONMENTAL PROTECTION AGENCY
MACHINERY MANUFACTURING AND REBUILDING SURVEY
Company Name
Site Name
Infornacion covered by a claim of confidentiality will be disclosed by EPA
only to the extent, and by means of the procedures, set forch in 40 CFR Part 2
Subpart B. In general, submitted information protected by a business
confidentiality claim may be disclosed to other employees, officers, or
authorized representatives of the United States concerned with carrying out
the Clean Water Act, or when relevant to any proceeding under the Act.
Effluent data are not eligible for confidential treatment.
INDUSTRY SECTORS:
For purposes of this regulation, EPA has identified fifteen major sectors that
perform machinery manufacturing, rebuilding and maintenance. The sectors are
defined in Table A.
QUESTIONS:
Questions about Part VI Financial and Economic Information may be directed as
follows:
For questions regarding scheduleT
RAFp/\£L ST
Analysis and Evaluation Division WH-586
U.S. Environmental Protection Agency
401 M Street, S.W.
Washington, DC 20460
For questions regarding, or assistance in completing, any item in Part VI of
the questionnaire, EPA has established a toll-free help line:
EPA Machinery Manufacturing & Rebuilding
Abt Associates Inc.
(800) 343-3019
PAULA
. 23-1-i )
BETH
82
-------
HACHINEB.Y MANUFACTURING AKD REBUILDING SURVEY Sice Name
TABLE A COMPOSITION OF MM&R SECTORS
HARDWARE
Metal Heac Treacing
Cutlery
Hand & Edge Tools, Except Mach. Tools, Saws
Hand Saws and Saw Blades
Hardware NEC
Screw Machine Products
Bolts, Nuts, Screws, Rivets, and Washers
Metal Shipping Barrels, Drums, Kegs, Pails
Iron and Steel Forgings
Crowns and Closures
Metal Stamping NEC
Steel Springs
Wire Springs
Miscellaneous Fabricated Wire Products
Needles, Pins, and Fasteners
Valves & Pipe Fittings, Except Brass
Fabricated Pipe and Fabricated Pipe Fitting
Fabricated Metal Products NEC
Machine Tools, Metal Cutting Types
Machine Tools, Metal Forming Types
Special Dies & Tools, Die Sets, Jigs, Etc.
Machine Tool Access. & Measuring Devices
Power Driven Hand Tools
Heatg. Equip. Except Elec. & Warm Air Frnc.
Fabricated Structural Metal
Fabricated Plate Work (Boiler Shops)
Sheet Metal Work
Architectural and Ornamental Metal Work
Prefabricated Metal Buildings & Components
Miscellaneous Metal Work
AIRCRAFT
Aircraft
Aircraft Engines and Engine Parts
Aircraft Parts and Auxiliary Equipment
Certified Air Carriers (Psngr. & Cargo)
Noncertified Air Carriers (Psngr. & Cargo)
Aircraft and Airport Maintenance
STATIONARY INDUSTRIAL EQUIPMENT
Steam. Gas, Hydraul. Turbines, Gen. Units
Internal Combustion Engines' NEC
Construction Machinery and Equipment
Oil Field Machinery and Equipment
Elevators and Moving Stairways
Conveyors and Conveying Equipment
Rolling Mill Machinery and Equipment
Metal Working Machinery NEC
Food Products Machinery
Textile Machinery
Woodworking Machinery
Paper Industries Machinery
Printing Trades Machinery and Equipment I
Special Industry Machinery NEC •
Pumps and Pumping Equipment
Ball and Roller Bearings
Air and Gas Compressors
Blowers and Exhaust and Ventilation Fans
Industrial Patterns
Speed Changers, High Speed Drivers & Gears
Industrial Process Furnaces and Ovens
Mechanical Power Transmission Equip. NEC
General Industrial Machinery NEC
Scales and Balances, Except Laboratory
Automatic Merchandising Machines
Commercial Laundry Equipment
Refrigeration & Air and Heating Equip.
Measuring and Dispensing Pumps
Service Industry Machines, NEC
Machinery, Except Electrical NEC
Transformers
Switchgear and Switchboard Apparatus
Motors and Generators
Industrial Controls
Welding Apparatus, Electric
Electric Industrial Apparatus NEC
Equipment Rental,/^ Leasing Services
83
-------
MACHINERY MANUFACTURING AND REBUILDING SURVEY Site Name
TABLE A (cone.) COMPOSITION OF MM&R SECTORS
ELECTRONIC EQUIPMENT
Radio & TV Communication Equipment
Eleccronic Capacitors
Electronic Coils and Transformers
Connectors for Electronic Applications
Electronic Components NEC
Electronic Mach., Equipment, & Suppl. NEC
MOBILE INDUSTRIAL EQUIPMENT
Farm Machinery and Equipment
Garden Tractors & Lawn & Garden Equipment
Mining Mach. & Equip.. Except Oil Field
Hoists, Industrial Cranes & Monorails_
Industrial Trucks, Tractors, Trailers
Tanks and Tank Components
INSTRUMENTS
Coating, Engraving and Allied Services 'NEQ.
Engineering and Scientific Instruments
Automatic Environmental Controls
Process Control Instruments
Fluid Meters and Counting Devices
Instruments to Measure Electricity
Measuring and Controlling Devices NEC
Optical Instruments and Lenses
Surgical & Medical Instruments & Apparatus
Orthopedic, Prosthetic, & Surgical Suppl.
Dental Equipment and Supplies
Ophthalmic Goods
Uatches. Clocks, Assoc. Devices & Parts
Pens, Mechanical Pencils, & Parts
Manufacturing Industries NEC
Miscellaneous Repair Shops & Related Serv.
PRECIOUS & NONPRECIOUS METALS
Jewelry. Precious Metal
Silverware, Plated Uare, & Stainless
Jewelers' Materials & Lapidary Work
Musical Instruments
Costume Jewelry
ORDNANCE
Small Arms Ammunition
Ammunition, except for Small Arms
Small Arms
Ordnance and Accessories NEC
SPACE
Guided Missiles and Space Vehicles
Guided Missile and Space Vehicle Propulsion
Other Space Vehicle and Missile Parts
HOUSEHOLD EQUIPMENT
Household Cooking Equipment
Household Refrig. & Home & Farm & Freezers
Household Laundry Equipment
Electric Housewares and Fans
Household Vacuum Cleaners
Sewing Machines
Household Appliances NEC
Electric Lamps
Current-Carrying Wiring Devices
Noncurrent-Carrying Wiring Devices
Residential Electrical Lighting Fixtures
Commercial, Industrial, and Institutional
Lighting Equipment NEC
Radio/Television Sets Except Commun. Types
Radio & Television Repair Shops
Refrig. & Air Cond. Serv. & Repair Shops
RAILROAD
Railcars, Railway ,;Sys terns
Line-Haul Railrad/fs
Switching and Terminal Stations
-------
, —
MACHINERY MANUFACTURING AND REBUILDING SURVEY Site Name
TABLE A (cone.) COMPOSITION OF MM&R SECTORS
SHIP
Ship Building and Repairing
Boat Building and Repairing
Transportation, Noncontiguous Deep Sea
Coastwise Transportation
Intercoastal Transportation
Great Lakes Transportation
Transportation on Rivers & Canals
Ferries
Lighterage
Towing and Tugboat Services
Water Transportation, Local. NEC
BUS & TRUCK
Truck and Bus Bodies
Motor Vehicle Parts and Accessories
Truck Trailers
Local and Suburban Transit (Bus & Subway)
Local Psngr. Trans. (Lim. . Arab.. Sightf^See)
Intercity and Rural Highway (Buslines)
Local Bus Charter Service
Bus Charter Service, Except Local
School Buses
Bus Terminal Oper. (Motor Vehicle Maint.)
Maint. Fac. for Motor Vehicle Psngr. Trans.
Local Trucking Without Storage
Trucking, Except Storage
Local Trucking With Storage
Freight Truck Terminals, W/ or W/0 Maint.
Truck Rental fie Leasing, Without Drivers
MOTOR VEHICLE
Carburetors, Piston Rings, Valves
Vehicular Lighting Equipment
Electrical Equipment for Motor Vehicles
Motor Vehicle Parts and Accessories
Motorcycles
Miscellaneous Transportation Equipment
Automotive Stampings
Motor Vehicle and Automobile Bodies
Travel Trailers and Campers
Taxicabs
Automotive Equipment
Automobile Dealers (New and Used)
Automobile Dealers (Used Only)
Gasoline Service Stations
Recreational & Utility Trailer Dealers
Motorcycle Dealers
Auto. Dealers (Dunebug. , Gocart. Snowtnble.)
Passenger Car Rental & Leasing. W/0 Driver
Utility Trailer & Rec. Vehicle Rental
Automobile Top and Body Repair
Automotive Paint Shops
General Automotive Repair Shops
Specialized Auto. Repair Shop & Insp. Ctrs.
Auto. Serv. (Includes Diagn. & Insp. Ctrs.)
Welding Shops (Includes Automotive)
OFFICE MACHINE
Typewriters
Electronic Computing Equipment
Calculating and Accounting Machines
Office Machines, Not Elsewhere
Photographic Equipment and Supplies
Computer Related Services
Electrical & Electronic Repair
85
-------
U.S. ENVIRONMENTAL PROTECTION AGENCY
MACHINERY MANUFCTURING AND REBUILDING SURVEY _
SECTION 1: FACILITY (SITE) FINANCIAL INFORMATION
This seccion requests economic and financial information for the facility As
in Parts I through V, the facility includes all plants at this physical
location. It is imperative that information provided here include the same
buildings and activities as those considered in responding to Parts I
through V.
All information requested in Part VI should be reported for the fiscal year
ending in 1989, unless otherwise specified. Your fiscal year may or may not
correspond to the calendar year.
What are the start and end months of the facility fiscal year (e e January -
01, December - 12)? y
a.
b.
1.
Facility fiscal year start month | _ | _ |
Facility fiscal year end month . | _ | _ |
for reporting facility Income Statement:
sib
Table 1 (page 90) requests facility revenue and expense information. Please
read the instructions and definitions below before completing Table 1. The
numbers in brackets, for example, "[I] Revenues", correspond to the entries on
Table 1.
Report all data for the facility for fiscal years 1987, 1988 and 1989. Report
all amounts in thousands of dollars.
Because the proposed machinery manufacturing, rebuilding and maintenance
regulations will control facility discharges, you are required to report
facility-level financial data. If, for certain items, you do not have amounts
ac the facility level, you may use the Income Statements of the division or
firm that owns or controls this facility to estimate amounts at the facility
level. If you need to estimate any it«m«, estimate them a* described belov.
If you have estimated an amount for a particular item, place an asterisk (*)
to the right of the entry and explain your estimation procedure in the
Comments Section on page 100.
Income Statement: Definitions
Revenues
Report the total revenues associated with all products and services provided
by your facility in the years 1987-1989.
86
-------
U.S. ENVIRONMENTAL PROTECTION AGENCY
MACHINERY MANUFACTURING AND REBUILDING
Company Name
Site Name
SECTION 1: FACILITY (SITE) FINANCIAL INFORMATION
1. Instructions fof reporting facility Income Statement information
(continued)
Expenses
Include all facility costs such as materials, labor and indirect costs that
were incurred during operations, used as operating supplies, or used in repair
and maintenance. Report total delivered cost after discounts and including
freight of materials actually used during the year. Include purchases, cost
of interplant transfers to the facility, and withdrawal from inventories.
[a] Material and Product Costs: Report the total cost of all raw
materials including packaging materials that were used.
[b] Labor Costs: Report the total cost, including fringe benefits and
payroll taxes, of all direct labor. wage/salary
[c] Cost of Contract ffork: Report the cost of all contract work done
for you by others. Include the total payments made during the year
for such work, including freight out and in.
[d] Other Costs: Include all other operating expenses not included in
[a] through [c].
[e] Depreciation: Report the depreciation on buildings, plant,
equipment, and machinery at your facility.
[f] Fixed Overheads: Report the total from all types of overhead.
Include rent, nonproduction utilities, selling costs, administration
and general expenses for your facility.
[g] Research and Development: Report all research and development costs
incurred during the year.
[h] Interest: Report the total interest expense on all funds during the
year.
[i] Federal, State and Local Income Taxes: Report the total federal,
state and local income taxes payable during the year. (Report other
taxes, such aa property taxes under [j].
[j ] Other Expenses: Report all other expenses not reported in items [a]
through [i].
[k] Total Costs and Expenses: Report the sum of items [a] through [j].
Operating
87
-------
U.S. ENVIRONMENTAL PROTECTION AGENCY
MACHINERY KANUFACTURING AND REBUILDING
Company Name
Site Name
SECTION 1: FACILITY (SITE) FINANCIAL INFORMATION
fl?r reportin2 facility Income Statement:
Estimating Procedures
• Estimating Revenues. In some cases, the facility does not sell its
products itself and, thus, does not know what revenues are generated
(e.g., the facility is part of a multi- facility firm in which two or
more facilities contribute to the final products). In such cases,
the final revenues the firm realizes from the sale or use of
manufactured, rebuilt or maintained products or equipment should be
allocated to the facilities involved in its production and
rebuilding or maintenance on the basis of each facility's share of
operating costs, burden costs or employees. An example of this
allocation procedure using operating costs is given below.
• Estimating Expenses. When certain cost elements (e.g., R&D and
federal taxes) are paid by the division or the firm, the facility's
share must be estimated. In this case, base the cost estimate on
the facility's share of the division's or the firm's U.S. sales.
Use the organizational level closest to the facility for which there
is the necessary data. If you do not have actual facility sales,
use the revenue estimate developed above.
88
-------
U.S. ENVIRONMENTAL PROTECTION AGENCY
MACHINERY MANUFACTURING ANI) REBUILDING
Company Name
Site Name
SECTION 1: FACILITY (SITE) FINANCIAL INFORMATION
1. Instructions for reporting facility Income Statement information
(continued)
Example of Estimating Facility Revenue*
Assume that the firm owning this facility also owns two other facilities that
perform different aspects of an overall aircraft production. For example,
assume that:
• Facility R manufactures and rebuilds aircraft parts;
• Facility S manufactures electronic components used in producing
aircraft; and
• Facility T produces aircraft frames and assembles the aircraft.
Further assume that no sales take place (i.e., no revenues are generated)
until the finished products are sold. Hence, revenues for each facility must
be estimated. This is done in terms of each facility's share of operating
costs relative to the total operating costs of the firm. For this example,
assume that the operating costs of complete aircraft production are:
Facility R has operating costs of $ 500,000
Facility S has operating costs of $ 500,000
Facility T has operating costs of $1,000,000
Total operating costs of the firm are $2,000,000
Given this distribution of costs, Facility R would be assigned one-quarter of
the firm's aircraft revenues, Facility S would be assigned one-quarter, and
Facility T would be assigned one-half of the firm's aircraft revenues.
Therefore, if the firm had aircraft revenues of $3,000,000 and you were
Facility R or Facility S, then your estimated revenues would be $750,000.
89
-------
U.S. ENVIRONMENTAL PROTECTION AGENCY
MACHINERY MANUFACTURING AND REBUILDING
Company Name
Site Name
SECTION 1: FACILITY (SITE) FINANCIAL INFORMATION
Instruction? for reporting facility Income Staremenc
(continued)
Complete the facility Income Statements, Table 1 below. Enter all
information in thousands of dollars as of the last day of each fiscal
year ending in 1987, 1988 and 1989.
TABLE 1 INCOME STATEMENT
[1] Revenues
[2] Expenses
[a] Material and product costs
[b]
[c]
[d]
[•]
[fj
[g]
[fc]
[I]
[J]
M
Labor costs
Cost of contract work done
1987
($000)
T187
T2a87
T2b87
T2c87
for you by others (other variable
cost)
Other costs T2d87
Depreciation (other fixed costs)
Fixed overhead
Research and development
Interest
Federal, state, and local
income taxes
Other expenses
Total costs and expenses
T2e87
T2f87
T2q87
T2h87
T2187
T2187
T2k87
1988
($000)
T188
T2a88
T2b88
T2c88
T2d88
T2e88
T2f88
T2q88
T2h88
T2188
T2188
T2k88
1989
($000)
T189
T2a89
T2b89
T2c89
T2d89
T2e89
T2f89
T2g89
T2h89
T2189
T2189
T2k89
90
-------
U.S. ENVIRONMENTAL PROTECTION AGENCY
MACHINERY MANUFACTURING AND REBUILDING
Company Name
Site Name
SECTION 1: FACILITY (SITE) FINANCIAL INFORMATION
2. Revenues by Sector
Please provide 1989 Revenues for each of the sectors shown on Table 2 (page
92). (The sectors are defined in Table A.) Revenues are divided into two
parts: (A.) Those derived from machinery manufacturing, rebuilding or
maintenance performed by this facility and (B.) Revenues derived from other
sources. The sum of (A) and (B) should equal 1989 revenues reported in
Table 1.
3.
Revenues by Sector and Activity
For each sector for which you reported revenues in Table 2,(part A), provide
the percentage of these revenues generated by each activity, i.e.,
manufacturing, rebuilding arid maintenance. Record the requested information
on Table 3 (page 93).
4.
Instructions for reporting Balance Sheet information
Table 4 (page 96) requests detailed facility Balance Sheet information.
Please read the instructions and definitions below before completing Table 4.
The number in brackets, for example, "[1] Inventories," correspond to Balance
Sheet entries on Table 4.
Report all data for the facility for fiscal years 1987, 1988 and 1989. Report
all amounts in thousands of dollars.
As with the Income Statement, you are required to report facility level data.
If, for certain items, you do not have amounts at the facility level, you may
use the balance sheets of the division or the firm that owns or controls your
facility to estimate the amounts at the facility level. Base the estimate on
vour facility's share of the division's or firm's total U.S. revenues. Use
whatever organizational level is closest to the facility for which the
necessary data are available. If you do not know actual facility revenues,
use the facility level revenues estimated for the Income Statement (Table 1).
If you have estimated an amount for a particular item, place an asterisk (*)
to the right of the entry and explain your estimation procedure in the
Comments Section on page 100.
Balance Sheet Definitions
Current Assets: Report current assets, including cash and other assets that
are reasonably expected to be converted to cash, sold or consumed during the
year, using the following categories:
91
-------
.1ACHINEB.* MANUFACTURING AMD REBUILDING SURVEY Slt« Name
» w u
i«. 3
2
O1
8**.}*. »* J5. JJ ** »« XKHXXX** (0 4J
00 00000 S S S S O O O (-4 C
§ § § §1111 § i^ §{3 1(3 |U it, it, $'*
fNCNrvi^jcNcNrsjcN CNCNCNCNCNCNCN -HC
SH EH EH =- ~ ~ EH E- EHEHEHEHEHEHEH ,_, ^
-i .il ** _*_******** MMXXXMX men
~j ~J ~~ U 0)
1 • 1 • H r-H
b. CO
_J _J _ Ei co
^o o ^ ouoou oo3cNc$i~5~Lnwat
J .| . .1 . . . . . .1 .1 . . ^ || 5 ^ ^H ,
H - O CN CN I
_ _J _ J _ J _ ______ J J ____ 2 ^ ^ H '
C -P
CD to vo
O O O C*l O JQ ^ QJ
.^ .Q .^ O f*> O O O f"| ^^ ^_f pg pr) ^* [^j ^i r_^
•—i CN n •^TLnvor^ao c^-—i i—it—it—it—ir-tCiitDrO <—it
ill "11" j "1.11"1"IT
i
i
i
i
i
i _
3IIIZIII I I
j sj
«^
i ;
i !
• i
c, as
*«
1 i i
S^
6 •
o •_> _<
I I I
&
i
u
I
i
i
.
_!
.e
la
, %l
£ a,
•S "*! c •*
?£
I III
i?|
_li
•*• u •—
Hi*
|l?
Ill
iii
« «• c
10 (0 10
i-l CN n
(N CN CM
EH EH E-t
(0 ra
T IT)
tN fsj
EH EH
10 to (0 10
vo r- co tTi
fN CN rsi CN
EH EH EH EH
92
CO rO (0 (0
O •-( CN n
(0 co
Tf IT)
CN CM CN CN CN CN
EH EH EH EH £H EH
crj
CN CN
EH EH
CO
r-
-------
Company Nam«
KANnTA.CTUB.ING AND REBUILDING SURVEY Site Name
TABLZ 3 1989 REVENUES BY SECTOR AND ACTIVITY
Revenues Derived
fron: For each sector, report percent of chose revenues froaj
Manufacturing Rebuilding Maintenance Total
Hardware
Aircraft
Electronic Equipemnt
Stationary Industrial
Equipment
Ordnance
Aerospace
Mobile Industrial
Equipment
Instruments
Precious and
Nonprecious Metals
Ship
Household Equipment
Railroad
Motor Vehicle
Bus and Truck
Office Machine
1
•' T31a
•!%T32a
.l%T33a
,l%T34a
l%T36a 1
.1 % T38a
.l*T39a
-l*T310a
.!%T311a
.l*T312a
-l%T313a
-l%T314a
-l%T315a
Other Manufacturing.
Rebuilding and
Maintenance
T316CCM | J_|%T316a
1 \-32b
1
!*T38b I
.l*T311b
.l*T312b
.l«T313b
T31c 100.0%
T32c 100.0%
100.0%
T34c 100.0%
100.0%
100.0%
!%T37c 100.0%
100.0%
100.0%
.!%T310d-00.0%
1
|_^.l%p315b I—itTSlSc100'0*
I%f316b
93
-------
U.S. ENVIRONMENTAL PROTECTION AGENCY
MACHINERY MANUFACTURING AND REBUILDING
Company Name
Site Name
SECTION 1: FACILITY (SITE) FINANCIAL INFORMATION
4- Instructions for reporting Balance Sheet: Information
[1] Inventories: Report the total value of all inventories owned by
this facility regardless of where the inventories are held.
Inventories consist of finished products, products in process raw
materials, supplies, fuels, etc. Report inventories at cost or
market. For inventories at LIFO cost, use the sum of the LIFO
amount plus the LIFO reserve.
[2] Other Current Assets: Report all other current assets such as
prepaid expenses like rent, operating supplies, and insurance; also
include cash and accounts receivable.
[3] Total Current Assets: This should equal the sum of items [1] and
[2J. If it does not, explain in the Comments Section on page 100
Noncurrent Assets: Report the total dollar value of all noncurrent assets
including physical items such as property, plant and equipment; long-term
investments and intangibles. Include:
Land: Report the original cost of land.
Building/Plant: Report the cost of buildings including expansions
and renovations net of
Equipment and Machinery: Report the cost of all equipment and
machinery net of deprecation.
Intangibles: Report intangibles including franchises, patents,
trademarks, copyrights net of accumulated amortization.
Other Noncurrent Assets: Report all noncurrent assets, including
investment in capital stocks and bonds.
[4] Total Noncurrent Assets: Report the total noncurrent assets from
each of the iteas listed above that apply.
Total Current and Nonctirrent Assets: Report the total dollar value of all
current and noncurrent assets.
[5] Total Current and Noncurrent assets: This should equal the sum of
items [3] and [4]. If it does not, explain why in the Comments
Section on page 100.
Current Liabilities: Report the total dollar value of all current liabilities
that fall due for payment within the reporting year.
94
-------
XS.S. ENVHIOHMEHTAI. PROTECTION AGEHCY
MACHINERY MANUFACTURING AMD REBUILDING
Company Name
Site Name
SECTION 1: FACILITY (SITE) FINANCIAL INFORMATION
4. Instructions
(continued)
reporting Balance Sheet information
Noncurrent Liabilities and Equity: Report all noncurrent liabilities that
fall due beyond one year, using the following categories:
[6] Total Current Liabilities: Report all current liabilities such as
accounts payable, accrued expenses and taxes, and the current
portion of long- tern debt.
[7] Long Term Debt and Other Noncurrent Liabilities: Report all long-
term debt such as bonds, debentures, and bank debt, and all other
noncurrent liabilities including deferred income taxes.
[8] Ovner Equity: Report the difference between total assets and total
liabilities. The amount obtained should include contributed capital
or paid-in capital (preferred and common stock) and retained
earnings .
[9] Total Noncurrent Liabilities and Equity: This should equal the sum
of items [7] and [8]. If it does not, explain in the Comments
Section on page 100.
Total Liabilities: Report total current and noncurrent liabilities and
equity.
[10] Total Liabilities and Equity: This should equal the the sum of
items [6] and [9], If it does not, explain in the Comments Section
on page 100.
95
-------
U.S. ENVIRONMENTAL PROTECTION AGENCY
MACHINERY MANUFACTURING AND REBUILDING
Company Name
Site Nama
SECTION 1: FACILITY (SITE) FINANCIAL INFORMATION
TABLE 4 BALANCE SHEET
ASSETS
Current assets
[1] Inventories
[2] Other current assets
[3] Total current assets
Noncurrent assets
[4] Total noncurrent assets
1987
($000)
T4187
T4287
T4387
T4487
1988
($000)
T4188
T4288
T4388
T4488
Current liabilities
[6] Total current liabilities T4687 T4688
Noncurrent liabilities and equity
[7] Long-term debt and other T4787 T4788
noncurrent liabilities
[8] Owner equity T4887 T4888
[9] Total noncurrent: liabili- T4987 T4988
ties and equity
Total liabilities and equity
[10] Total current and non- T41087 T41088
current liabilities and
equity
1989
($000)
T4189
T4289
T4389
T4489
[5] Total current and non-
current assets
LIABILITIES
T4587
AND EQUITY
1987
($000)
T4588
1988
($000)
T4589
1989
($000)
T4689
T4789
T4889
T4989
T41089
96
-------
U.S. ENVIRONMENTAL PROTECTION AGENCY
MACHINERY MANUFACTURING AND REBUILDING
Company Name
Site Name
SECTION 1: FACILITY (SITE) FINANCIAL INFORMATION
5. 1988 Market Information
For each of the markets in which you operate (i.e., local/regional, national,
international), please identify your major source of competition. Check only
one source in each column.
Competition
[1] Domestic producers of the
same or similar products
[2] Foreign producers of the
same or similar products —
Local/
Regional National International
I I I I
[3] No competition in this market |
[4] Do not operate in this market
I 1
I I
I i
/5 / Incorrect response error
T5a
T5b
T5c
97
-------
U.S. ENVIRONMENTAL PROTECTION AGENCY
MACHINERY MANUFACTURING AND REBUILDING
Company Name
Site Name
SECTION 1: FACILITY (SITE) FINANCIAL INFORMATION
6. Assume that you decide to close the facility voluntarily and to liquidate
the assets over the next three years. Estimate the liquidation value,
less closure and post closure costs, of this facility. Report all
amounts in thousands of dollars. Some of this information may not be
readily available at the facility and you may need to develop estimates.
Possible sources of information for [1] below include insurance policies,
recent appraisals or purchase. Include the following:
[1] Revenue that you would expect to
receive upon:
[a] Sale of the facility's fixed
assets ($000) (excluding
buildings and land)
[b] Sale of buildings and land ($000)
(If the facility-is leased,
enter zero).
[c] Liquidation of inventories ($000)
[2] Working capital ($000)
[3] Closure costs (e.g., legal fees,
employee' termination compensation)
($000)
T61b
T61c
T62
T63
[4] Post-closure costs (e.g., site
clean-up, legal fees.) ($000)
[5] Estimated Liquidation Value ($000)
(Should equal the sum of items
[1] and [2] less [3] and [4].
If not, explain in Comments Section
on page 100.)
7. Do you own, le«s« or rent your facility?
Lease or rent
Own
T64
T65
1 (CONTINUE) T7
2 (SKIP TO 9) T8
8. How long is your lease or rental agreement?
(GO TO SECTION 2 on page 101.)
years
98
varies = 99999997
month to month = 99999998
year to year = 99999999
-------
U.S. ENVIRONMENTAL PROTECTION AGENCY
HACHINERY MANUFACTURING AND REBUILDING
Company Name
Site Name
SECTION 1: FACILITY (SITE) FINANCIAL INFORMATION
9. What was the 1989 property tax assessed value of the items listed below?
Report the values in thousands of dollars and enter zero if the item
listed is not applicable.
State tax assessed value ($000)
[1] Land T91
[2] Buildings T92
[3] Equipment and machinery T93
[4] Other (Specify) . . . T94
[5] Total property tax assessed value .... T95
Local tax assessed value
[6] Land T96
[7] Buildings T97
T98
[8] Equipment and machinery , ________
T99
[9] Other (Specify)
[10] Total property tax assessed value .... T910
10. What was the 1989 assessed value of the property expressed as a
percentage of full market value (i.e., the 1989 level of assessment)?
This information should be on your tax bill or available from your state
or local tax department.
[1] State assessment percentage | | . I 1% TlOa
[2] Local assessment percentage | | . I 1% TlOb
99
-------
U.S. ENVIRONMENTAL PROTECTION AGENCY
MACHINERY MANUFACTURING AND REBUILDING
Company Name
Site Name
SECTION 1; FACILITY (SITE) FINANCIAL INFORMATION
Comments for Section 1. Reference entries by question number
CCMMENT1
100
-------
U.S. ENVIRONMENTAL PROTECTION AGENCY
MACHINERY MANUFACTURING AND REBUILDING
Company Name
Site Name
SECTION 2: FIRM FINANCIAL INFORMATION
All of the information requested in Section 2 applies to the firm or other
organization which owned or controlled this facility on the last day of the
fiscal year ending in 1989. You may need to obtain information from company
headquarters. All facilities that filled out Parts I through V of the
questionnaire must complete Section 2 of Fart VI.
11. Report the type of organization that best describes the ownership of
this facility on the last day of the fiscal year ending in 1988.
(CHOOSE ONLY ONE.)
A single facility company (i.e., this is
the only facility owned by this firm.) .... 1 (SKIP TO Q.15) Til
A multi-facility company (i.e., your firm
owns two or more facilities) ... 2 (CONTINUE)2
Other (SPECIFY)
T11CCM
3 (CONTINUE)
12. What are the start and end months of the firm fiscal year (e.g., January
- 01, December - 12)?
a. Firm fiscal year start month
b. Firm fiscal year end month .
1—I—' T12a
13. Report the name, mailing address and DUNS (from Dun & Bradstreet) number
of the firm, or other controlling organization.
[1] Name of Firm
[2] Mailing Address of Firm's Headquarters
I_!_J_J_1_L_L_!_I_1-J-_I_I—i—!_!_!_ 1
Street or P.O. Box
I_J__I_J_I_!_J_!_J—I—I—I—!—I—!_!_!—1
City or Town State Zip Code
[3] What is the DUNS Number of the firm?
| j j - | | j j - |_|_J 1 1 I INot Applicable T133a T133b
T131
T132a
T132b T132c
1 = Not Applicable
101
-------
U.S. ENVIRONMENTAL PROTECTION AGENCY
MACHINERY MANUFACTURING AND REBUILDING
Company Name
Site Name
SECTION 2: FIRM FINANCIAL INFORMATION
14. Report the total revenues of the firm for the fiscal years ending in
1987, 1988 and 1989, in thousands of dollars.
[1] 1987 Revenues
[2] 1988 Revenues
[3] 1989 Revenues
($000)
T141
T142
T143
15. Assuming that you were going to make a major capital investment
today, what would be your cost of capital (e.g., what interest
rate would you pay if you borrowed the money or used your line of
credit)?
~~ | | j_| | |% T15a
16. Was the firm (listed on Question 13) owned or controlled by another
company (i.e., a parent firm.)?
Yes 1 (CONTINUE)
No 2 (SKIP TO SECTION 3)
T16
17. Report the name, mailing address and DUNS number of the parent or
controlling firm.
[1] Name'
1_J_J_L_ 1_J__!_!_I_I_J_I_1_J_I_!_I_!
[2] Hailing Address of Headquarters of Parent Firm
T171
T172a
T172b
T172c
Street or P.O. Box
City or Town
172b
[3] DUNS Number
I__1_J - I_1_L_1
State Zip Code
172c
- I_J__L_!__! l_JNot Applicable
1 = Not Applicable
T173a
T173b
102
-------
S.S. SSyXROHMEHTAli PROTECTION AGENCY
MACHINERY MANUFACTURING AND REBUILDING
Company Name
Site Name
SECTION 2: FIRM FINANCIAL INFORMATION
Comments for Section 2. Reference entry by question number.
COYMENT2
103
-------
U.S. ENVIRONMENTAL PROTECTION AGENCY
MACHINERY MANUFACTURING AND REBUILDING
Company Name
Site Name
SECTION 3: FACILITY CONTACT
Enter the name, title, telephone number and address (if different from the
facility mailing address) of the facility representative to be contacted with
questions regarding your responses to Part VI:
__________________ T3F1
Name (First and Last)
I— I_!_1_J_1_]_I_I_1_|_1_|_J_|_J_|_| T3F2
X 1.CJL&
l_J_J_l - l_l_l_l -!__l_|_l_| T3F3
Telephone Number
I_L_!_1_J_J_!_1_I_I_J_I_!_1_1_J_J_I T3F4
Address (if different from facility mailing address)
I_I_I_!__1_L_I_1_J_1_J_!_I_J_|_J_|_J T3F5
Firm or Facility Name
I_I_L_I_I_L_1_1_I_!_J_I_|_J_!_1_J_| T3F6
Street or P.O. Box
i_i_H_i_i_i_i_i_i_i_i_i_i_i_
City or Town State Zip Code
SEQU
CERTIFICATION: The information provided in Part VI of the survey,
as well as that: provided in all others, must be certified
by having the responsible individual for your facility complete and
sign the Certification Statement item 5 of Part I of this questionnaire.
104
-------
MACHINERY MANUFACTURING AND REBUILniNr. SURVEY
CODES FOR -FLAG- FIELDS
ID*
FAOLJTTY NAME
TABLE 1. pJO
Variables: YRFlagl: YRFIagZ- YRFlagS:
NOTE possible values: 87, 88, 89. 90, 91
01 = OK that information is missing for that fiscal year
TABLE Z ix92
Variable: YRFlag4:
NOTE possible values: 87. 88. 89, 90, 91
TABLE 3. p.93
Variable: YRFlagS:
NOTE possible values: 87. 88. 89. 90, 91
TABLE 4. p.96
Variables: YRFlag6:_
YRFlag7:_
YRFlag8:_
NOTE possible values: 87. 88. 89, 90, 91
01 = OK that information is; missing for that fiscal year
QUESTIONS, p.97
Variables: YRFlagl6:
NOTE possible values: 87. 88, 89. 90, 91
QUESTION 9, p.99
Variables: YRFlaglS:
NOTE possible values: 87. 88. 89, 90, 91
OUESnON'lO. p.99
Variable: YRFlagl2:
NOTE_possible values: 87, 88, 89, 90, 91
QUESTION 14. p.102
Variables: YRFlag9:_
YRFlaglO:_
YRFIagll:_
NOTE possible values: 87, 88, 89, 90, 91
Is this a Government Owned Company Operated (GOCO) facility?
Variable: FlaglS:
NOTE possible value: 1 (yes)
Is this an Internal Services Company?
Variable: Flagl4:
NOTE possible value: 1 (yes)
Zero'Taxes
Variable: Flagl7:
NOTE possible values: 1 = Subchapter S 2 = Partnership 3 = Chapter 11 Bankruptcy
4 = Loss carried forward 5 = OK for other miscellaneous reasons
Interest vs. Long-term Debt
Variable: FlaglS:
NOTE possible values: 1 = Chapter 11 Bankruptcy
2 = S other noncurrent liabilities that don't accrue interest
3 = OK for other reason
Net Current Assets
Variable: Bagl9:
NOTE possible values: 1 = OK
-------
-------
Appendix B
Estimating Cost Pass-Through Potential for MP&M Sectors
B.I Introduction
This appendix describes the methodology by which compliance cost pass-through coefficients were
calculated for each sector and used in the facility impact analysis. The cost pass-through coefficient is a
measure of how much of compliance-related cost increases a facility can be expected to pass on to its
consumers. The analysis blends findings from two separate analyses to estimate a composite measure of
pass-through potential:
• An econometric analysis of the historical relationship of output prices to changes in input costs.
This analysis provides a numerical estimate of pass-through potential at the MP&M sector level.1
• An analysis of indicators of pass-through potential based on current market structure and
performance.2
The results from these analyses bear equal weight in defining a composite measure of pass-through
potential for the facility-level financial analysis. The first analysis defines the numerical range of cost
pass-through potential that the MP&M category has historically exhibited. It seeks a reasonable range of
values; however, it does not alone assign any particular value to a MP&M sector facility. That task is
shared with the analysis of the structure and conduct of each sector. This second analysis scores the sectors
by their theoretically predicted ability to pass through compliance costs. These scores were blended with
information from the econometric analysis and the combined result was used to assign each Phase I sector
to a particular range of likely numerical values of cost pass-through potential.
The following discussion reviews the methodology for defining a composite measure of
pass-through potential and summarizes the results from that analysis. The discussion is organized as
follows. The immediately following section, B.2, reviews the econometric analysis of cost pass-through
potential based on the historical change in output prices relative to change in input costs, while the next
section, B.3, reviews the analysis of cost pass-through potential based on market structure considerations.
1 This analysis was undertaken for all of the 15 Phase I and Phase n MP&M industry sectors.
2 This analysis was undertaken for all of the 15 Phase I and Phase n MP&M industry sectors except for one part of
the analysis that depended on Section 308 Survey data. The Survey data were available only for the Phase I sectors.
B.I
-------
The next section, B.4, describes the procedure for combining the measures of pass-through potential to
generate composite estimates of partial-cost-pass-through potential by MP&M industry sector and Section
B.5 outlines an adjustment to those values to reflect the estimated share of output in each sector that is
expected to be subject to regulation and bear compliance costs. The final section of the appendix, B.6,
describes the use of the estimated partial-cost-pass-through values in the facility-level financial analysis.
B.2 Estimating Cost Pass-Through Potential Based on the Historical Change in Output Prices
Relative to Change in Input Costs
The analysis of the potential for a facility to pass compliance costs through to its customers
involves considerable analytic challenge. Two factors determine the share of a cost increase that a facility
can pass through to its customers: the elasticity of demand and the elasticity of supply in the facility's
market. Both factors are difficult to measure accurately. One reason for the difficulty is that observed
changes in price include changes due to changes in both demand and supply. In view of this difficulty, this
pass-through analysis does not decompose cost pass-through into the separate effects stemming from
elasticity of demand and elasticity of supply. This restriction is reasonable because the value of interest is
the composite of the two elasticity effects: that is, the change in equilibrium revenue due to a change in
input costs.
An additional analytic challenge involves joint consideration of quantity and price effects.
Specifically, the amount of cost increase that a firm may recover through a revenue increase may generally
be decomposed into a change in price and a change in quantity. In most markets, increased prices (in
response to increased costs) translate into reduced quantity of sales. Whether or not total revenue increases
depends on the interaction of supply and demand elasticities.
For both theoretical and computational reasons, this effort focused on the change in equilibrium
price due to a change in input costs. Changes in market quantities were determined from closures, rather
than by estimating changes in output in non-closing facilities. The analysis does not analyze changes in
revenue at the facility level that would result from a change in quantity of shipments or sales at the facility.
Instead, for the facility-level analysis, the analysis assumes that the quantity of shipments or sales does not
vary with the increase in fixed and average costs. This restriction is supported on the following grounds:
The cost model for the individual facility necessarily reflects a constant marginal cost relationship.
The change in quantity of output at a facility is a function of the change in equilibrium price and
the marginal cost relationship at the facility. For instance, in the case in which marginal cost
B.2
-------
increases with output, an upward shift in the marginal cost relationship due to compliance costs
will generally cause a facility to reduce its quantity of production. The extent of changes in
production quantity will vary across facilities based on the shift in marginal cost and the rate at
which marginal cost changes with production. However, the engineering analysis of facilities
provides no information about any change in the marginal cost relationship for a given facility. The
only costs provided are lump-sum costs. In lieu of this information, the analysis assumes constant
marginal costs, which in turn means that profit-seeking facilities will tend not to change their
output quantities in response to added costs resulting from regulation. As a result, the only
quantity-related decision that can be meaningfully analyzed at the facility level is whether to
terminate production completely.
• An estimate of quantity response would be based on the aggregate industry response and would not
be logically applicable to the facility-level analysis. It is possible to estimate a quantity elasticity
response to change in input costs. However, this value would represent the aggregate quantity
response in the particular MP&M sector. The aggregate response encompasses a diversity of
responses across facilities: a few facilities may eliminate production entirely while others may
reduce, keep the same, or even increase output. Applying the aggregate quantity response to
individual facilities while simultaneously allowing for the termination of production would
exaggerate the likely facility-level quantity response and the likelihood of facility closures. The
current analysis simulates the aggregate response from a micro-analytic perspective: the
industry-wide quantity response is effected by the exit of facilities for which compliance was found
to be an uneconomic proposition.
In summary, the methodology estimates directly a measure of equilibrium price sensitivity to
changes in input costs, such as would result from compliance with effluent limitations3. The "cost elasticity
of price," denoted Ep, measures the percentage change in output price per percent change in unit input
costs.4 The cost elasticity of price was estimated by linear regression on ten years of annual input price
indices, at the MP&M industrial sector level of aggregation. The 15 MP&M industry sectors encompass
3 One important difference between compliance costs and general input cost increases is that the former is known
to apply to only part of the facilities in the regulated industry (i.e., effluent dischargers). That compliance costs are
likely to be born by only a part of the industry is significant because facilities that incur compliance costs may be
placed at a competitive disadvantage relative to those facilities that do not incur compliance costs. This effect is
taken into consideration as a final adjustment to the estimated cost pass-through capability.
4 Because quantity of production is assumed constant, the elasticity measure applies to revenue as well.
B.3
-------
163 industrial 4-digit SIC code groups that engage in some combination of manufacturing, rebuilding and
repairing. The MP&M sectors are a categorization created by EPA for the survey process. Each sector
contains between 1 and 39 four-digit SIC industries.5 Estimation of Ep requires for each MP&M sector a
measure of the change over time in input costs (input cost index) and a measure of the change in output
price (output price index).
The input cost index on which the regression is based is an average of the producer price index
values for commodity inputs to the sector in question, weighted by the share of each input to sector output.
The weighted average calculation involves two steps:
First, at the 4-digit SIC level, an aggregate measure of input cost was developed from yearly
Producer Price Index (PPI) values from the Department of Commerce, weighted by the direct requirement
coefficients from the 1982 Benchmark Input-Output Tables of the United States.6 For the value-added
component to production cost, the Employment Cost Index (ECI) from the Department of Commerce for all
private manufacturers was used. Estimating a contribution to value-added from labor costs alone excludes
consideration of changes in payments to equity capital. However, available measures of payments to capital
are not likely to improve the accuracy of the input cost index. Furthermore, the direct requirements
coefficients from the input-output table include information on the purchase of capital goods, and changes
in the cost of capital goods are reflected in the PPI series for the associated industries. The input cost index
for a 4-digit SIC group was calculated as a weighted average of prices of a sample bundle of inputs
comprised of the most significant inputs that collectively account for at least 50 percent of the total input
cost associated with the relevant 4-digit SIC industry. The Bureau of Economic Analysis' Input-Output
Table uses its own industry classification system, which is similar to the Standard Industrial Classification
(SIC) used in the Census of Manufactures. In this appendix, this classification system is called the BEA
classification. The BEA classification has more categories than the SIC system, but the BEA classification
codes were grouped so that they map to the more aggregate SIC codes that form the MP&M sectors.
It would have been possible to estimate elasticities at the 4-digit SIC level; however, this level of analysis would
have meant 163 instead of 37 regression analyses at the segment level. Moreover, analytic precision would not
improve, since segment data would be aggregated by linear combination of 4-digit SIC data either before or after
estimation of the elasticities.
The direct requirement coefficients describe the composition of production inputs required to produce the output
from a given industry. The direct requirement coefficients may be defined as follows: for each of dollar of output
from industry /, the direct requirements coefficient ij indicates the value of input./ required to achieve one dollar of
output from industry /'. The sum of all requirements coefficients r,- for industry; equals one.
B.4
-------
Second, at the MP&M sector level, the input cost index was developed by weighting the individual
4-digit SIC group cost index values by 4-digit SIC value of shipments from the Census of Manufactures
and various Annual Surveys of Manufactures from the corresponding years. The resulting values provided
an aggregate measure of input costs over the 10-year period, 1982-1991, for each MP&M sector.
To summarize, the input cost index was calculated as follows:
For each 4-digit SIC industry, i, that uses non-labor inputs, j, the average input price for the
year k is:
where:
PPIi
LJ,k
Zn
Average input price index for SIC industry i, year k
Direct requirements coefficient for input commodity j by industry i
Producer Price Index, commodity j, year k
These input price index values by 4-digit SIC group were then aggregated to the level of the
MP&M industry sector based on the SIC code composition of the sector. The price index value for each 4-
digit SIC group was weighted according to the share of total shipments in the MP&M sector.
For each MP&M industry sector, containing N 4-digit SIC industries, the average input price in
each year k is:
N
Zqi,kxPi,k
Pin.k = -—r:
where:
Pin,k
= Average input price index value for a given MP&M sector in year k
= Input price index value for SIC industry i, year k
= Value of shipments for SIC industry i, year k.
B.5
-------
Within this expression, the direct requirements coefficients and weighting by production value are
constants over time. However, the underlying price index values from the PPI and the measure of labor cost
vary over time. Thus, the input cost index of Pin,k values is a fixed-weight input cost index.
Similarly, the output price index, which is the dependent variable estimated, is the weighted
average of producer price indices for the goods produced by the industries in each sector and is calculated
as follows:
where:
Pout,k
qi,kxPPIi.k
pout,k =
Average output price index value for a given MP&M sector in year k
Value of shipments for SIC industry i, year k
Producer Price Index for the output of SIC industry i, year k.
The producer price index is an appropriate measure of output price because it measures change in
the price received at the plant gate by the producer and is therefore the relevant price for the producer's
production decisions. The price at the plant gate, or the free-on-board plant price, are terms for the price
that the facility 'fcees" when making production decisions. Furthermore, MP&M products are
characteristically intermediate goods, whose market prices are producer prices.
For each MP&M sector, a relationship for the k = 1 - 10 yearly observations was estimated by
least-squares, linear regression, as follows:
In(Pout.k) = a + EP x In(Pin.k) + b x ln( Wk)
+ e
where:
a = intercept
= Elasticity of output price with respect to input costs (non-employment) for a given
MP&M sector
B.6
-------
Poutjc = Price index for the bundle of goods produced by the MP&M sector, year k
Pin,k = Price index of inputs to sector, year k
b = Elasticity of output price with respect to employment costs
Wk = Employment Cost Index, all private manufacturing, year k
s = Error term.
Specifying the key variables in the regression as logarithms permits direct estimation of the
elasticities of output prices with respect to the independent variables. That is,
_ dln(Pout.k) _ d(Pout,k)/Pout,k
P~ dln(Pin.k) ~ d(Pin,k)/Pin,k
which is the elasticity of output price with respect to input cost.
In addition, the use of the logarithmic transformations eliminates any linear trend over time; in
effect, the individual yearly observations are converted to cross-sectional variables and the model does not
need to incorporate a specific time-series structure. Additional independent variables were considered that
might aid in explaining changes in output prices. For example, energy costs might have been an appropriate
variable to add because changes in energy costs can shift the demand and supply curves for sector output
through an income effect as well as through complementarity. However, the input cost data include a wide
range of energy cost values already. Some measure of aggregate income might have been included, but such
measures did not contribute significantly to the estimated relationships.
The coefficients Ep from the above regression are the estimated cost-elasticities of price for each
MP&M sector. The estimated coefficients address the question: over the period of analysis, by how much
did output prices change as input costs increased? The value of Ep for each sector, linked with other
information on market structure, yields a composite measure of pass-through potential by MP&M sector.
As discussed below, the estimated values of Ep were used to define the numerical range of expected cost
pass-through potential for the different MP&M industrial sectors. The Ep values estimated for a given
sector are not necessarily the cost pass-through values that are ultimately assigned to that sector for the
economic/financial impact analysis. The actual assignment of a cost pass-through potential to a sector and
the sample facilities within the sector depends on both the estimated Ep values for the sector and the market
structure information discussed in the following section. The Ep values thus serve a dual purpose: first, they
B.7
-------
provide one part of the measure of cost pass-through potential for a sector and its facilities; second, they
provide a method for calibrating the numerical values of cost pass-through capability given the variations
in market structure and expected pass-through potential across MP&M sectors and sectors.
The estimates of Ep are likely to be no less accurate than estimates derived from other feasible
methodologies. For example, one could conduct the same analysis at a four-digit SIC level, instead of
aggregating into sectors. However, aggregating by linear combination before the regression generates no
less reliable an estimate of sector elasticities than estimating the four-digit elasticities, and then aggregating
by the same output-weighted linear combination. Aggregating first reduced the number of regressions
needed by a factor of four. Another approach might have involved estimating supply and demand
elasticities separately, then calculating the implied elasticity of equilibrium price. Given the available
information, such a methodology would probably have gained little precision. The supply and demand
models each require stringent assumptions, and to guarantee a reasonable outcome would require even
more constraints that would likely negate the precision of the starting model.
Table B-l gives the estimated parameter coefficients and t-statistics for each of the Phase I sectors.
Based on historical data, MP&M industries have been able to increase prices, at the margin, between 0.77
percent and 0.94 percent for every 1 percent increase in non-labor input costs. These estimates are highly
significant: the R-square values, a measure of goodness of fit, exceed 99 percent in each sector.
The coefficients on labor also appear with significant coefficients, at the 95 percent confidence
level, but with lower estimated values. Within the context of this analysis, this finding suggests that output
prices have varied less in response to changes in labor costs than in response to price increases of other
inputs — all other things being equal. When both labor cost and output prices rise, non-labor costs are
probably increasing, also, and it is this non-labor cost increase that, in this regression analysis, is found to
drive output prices upward. Goodness of fit notwithstanding, a regression analysis cannot prove causality.
The lower coefficient on labor may reflect long-term contracts that stabilize labor costs with respect to
other input costs, which may vary in a way that is more similar to output prices. In addition, improvements
in labor productivity weaken the link between changes in labor costs and output prices.
A high degree of collinearity between labor and non-labor inputs might cause problems in
estimating on the basis of OLS regression. However, the parameter estimates were stable across alternative
model specifications suggesting that multicollinearity is not a problem in this regression analysis.
B.8
-------
Table B»J: Ctart Pass-Through Regression Results for MP&M Sectors, Phase I and Phase H
MP&M Sector
Hardware
Aircraft
Electronic Equipment
Stationary Industrial Equipment
Ordnance
Space
Mobile Industrial Equipment
Instruments
Precious and Non-Precious Metals
Ship
Household Equipment
Railroad
Motor Vehicle
Bus & Truck
Office Machinery
Regression Coefficients (^-statistics in parenthesis)
Input Price Index
.8888
(27.02)
.9241
(37.22)
.8990
(25.28)
.9090
(28.09)
.9068
(29.05)
.7735
(12.73)
.9010
(23.94)
.9231
(46.44)
.9383
(24.82)
.9703
(34.68)
.9205
(43.033)
.9106
(30.52)
.8984
(27.85)
.9301
(30.91)
.9201
(35.05)
Employment Cost Index
.0046
(3.68)
.0031
(3.32)
.0047
(3.46)
.0038
(3.06)
.0038
(3.18)
.0098
(4.21)
.0039
(2.68)
.0033
(4.34)
.0024
(1.68)
.0010
(0.93)
.0034
(4.16)
.0037
(3.23)
.0042
(3.36)
.0028
(2.46)
.0035
(3.52)
Rank
2
12
4
7
6
1
5
11
14
15
10
8
3
13
9
Source: U.S. Environmental Protection Agency
The median pass-through coefficient over the 15 MP&M Phase I and Phase II sectors is 0.91. All
but one (Aircraft) of the seven MP&M Phase I sectors were estimated to have pass-through coefficients
above the median for the total 15 MP&M sectors.
The direct estimation used in this methodology measures actual changes in output price with
respect to changes in input costs. It has the advantage of taking into account the full range of possible
mechanisms by which input costs affect output prices, including technical changes, substitution,
non-competitive pricing mechanisms, imperfect information phenomena and any other shifts or
irregularities in the supply and demand functions. For instance, the MP&M sector may exhibit unique
demand elasticities because many of the products of MP&M facilities have few substitutes. A customer
may have few options other than buying now, buying later or buying from abroad.
B.9
-------
B.3 Estimating Cost Pass-Through Potential on the Basis of Market Structure
The second part of the analysis of cost pass-through potential builds from an analysis of current
market structure within the MP&M industry sectors and uses information from the industry profile and the
Section 308 Survey of MP&M facilities. Although this second method for estimating Ep gives ordinal
rather than numerical results, it is no less accurate or rigorous in its analytic principles.
Information on the competitive structure and market characteristics of an industry provide insight
into the likely ranges of values for supply and demand elasticities and the sensitivity of output prices to
input costs. When an input cost increases, the profit-maximizing firm attempts to maintain its profits by
increasing output prices accordingly. How much of the cost increase the firm can pass on through higher
prices depends on the relative market power of the firm and its customers. The following discussion
identifies six indicators of market power used to assess cost pass-through potential. The first five of these
indicators depend on analysis at the MP&M sector level, while the sixth indicator uses facility-specific
information. As a result, the estimate of cost pass-through potential from this analysis is facility-specific,
but the variation between facilities in the same sector is small. These six indicators are as follows:
1 • Horizontal Concentration. The extent of concentration among a group of market participants is an
important determinant of that group's market power. A group of many small firms typically has
less market power than a group of a few large firms. Eight-Firm Concentration Ratios, published
by the Department of Commerce, measure the percentage of value of shipments concentrated in the
top eight companies in each four-digit industry. Sector Concentration Ratios are the weighted
averages of component industry concentration ratios, weighted by value of shipments. As the sector
concentration ratio increases, firms in an industry are expected to be better able to pass on input
cost increases, all other things being equal.
For a given degree of horizontal concentration in an industry, the ability of firms to exert market
power may sometimes vary with the size of the firm. However, whether such differences favor
large firms or small firms is uncertain and will generally depend on the extent to which the goods
and services of small and large firms are directly competitive. Where small firms cannot
differentiate their production from that of larger firms, larger firms may generally have a price
control advantage over small firms. However, smaller firms are sometimes able to insulate their
markets somewhat from the competition of larger firms by product and service differentiation. In
these cases, the smaller firms may enjoy greater market power and control of pricing decisions than
_
B.10
-------
large firms. Differential regulatory effects upon large and small firms are treated in the regulatory
flexibility analysis contained in the Economic Impact Analysis Report.
Vertical Concentration. Specialization Ratios, also from the Department of Commerce, provide a
measure of vertical concentration. While the number and size of firms across an industry is called
horizontal concentration, the number of related industries each firm participates in is called vertical
concentration. A vertically concentrated industry includes firms that produce several commodities
that are typically sequentially ordered in production. The specialization ratio is not a direct
measure of the relationship between products produced by an industry; no such measure is readily
available. The specialization ratio, however, does measure the percentage of the value of
shipments by an industry outside of the industry's primary commodity. Accordingly, a high
specialization ratio means that the firms in an industry cannot have significant vertical
concentration. Alternatively, a lower specialization in an industry means more production of other
commodities, which permits the possibility of vertical integration. Thus, a lower specialization
ratio increases the likelihood that the firms in an industry produce commodities that are vertically
linked in production, which in turn implies higher market power.
Import Competition. Import Penetration, defined as the ratio of imports in a sector to the total
value of shipments in that sector, measures the availability of substitutes from abroad. Higher
import penetration generally means that firms are exposed to greater competition from foreign
producers and will thus possess less market power to increase prices in response to regulation-
induced increases in production costs. The Department of Commerce provides import data at the
4-digit SIC code level.
If historical changes in input costs have affected both domestic and foreign firms more or less
uniformly, then the econometrically estimated Ep would not address situations in which only
domestic firms face higher costs. In this case, foreign firms could offer a substitute supply of goods
that is not subject to upward price pressures from effluent limitations costs. This observation
would not hold if: (1) foreign firms face similar environmental demands from their own
governments, or (2) the United States were able to impose environmental standards on MP&M
products and production processes at the point of sale, regardless of origin, instead of on the
producers.
Export Competition. Export Share of Shipments, defined as the percentage of shipments from a
sector that is sold to export markets, measures the degree to which that sector is exposed to
B.ll
-------
competitive pressures abroad in export sales. The MP&M regulation is not expected to increase the
production costs of foreign producers, with whom domestic firms must compete in export markets.
As a result, sectors that rely more on export sales are expected to have less latitude to increase
prices of their products in response to regulation-induced increases in production costs.
Long-Term Trend in Industry. The competitiveness of an industry and the ability of facilities to
engage in price competition differ between declining industries and growing industries. The
Average Growth Rate in shipments between 1982 and 1991 for each sector is compared to the
median of those average growth rates among the 15 sectors. Those with higher than median growth
rates are deemed to be better positioned to pass-through compliance costs, rather than absorb cost
increases in order to retain market share.
Competition Barriers. Barriers To Entry and Exit help a concentrated industry exert market power
by deterring potential competitors from entering the market. Without these barriers, a firm that
tries to pass on compliance costs by raising its prices more than necessary to maintain normal
profits would risk losing market share to new firms that see an opportunity to compete at these
higher prices. Entry barriers include high capital costs, brand name reputations that would require
a large advertising expense to overcome, a long learning curve, and any other factors that make the
fixed cost for new entrants higher than the fixed cost of existing firms. Exit barriers include factors
that make it difficult for a firm to stop producing in its industry, such as specialized machinery that
cannot be sold or converted to alternative uses, or brand names that cannot transfer well to other
products. If the manufacturer of Velveeta were to change its output to stationery, for instance, its
investment in the Velveeta trade name would be partially lost.
If entry barriers are the fixed costs of beginning business in an industry, then exit barriers are the
fixed costs of commencement that cannot be salvaged upon leaving the industry. They are
sometimes called sunk costs and are measured as the difference between the replacement value of a
facility's capital and its liquidation value. Without exit barriers, entry barriers cannot be effective.
However, it is difficult to estimate accurately the capital valuations needed to measure exit
barriers. One way to avoid the data availability problem is to identify directly the presence of
above-normal profits that entry and exit barriers permit.
A facility's risk-normalized profit rate is measured as its pre-tax return on assets (ROA), as
calculated from Survey data, divided by that facility's p-coefficient. Each Survey facility was
assigned to the sector from which it receives the largest portion of its revenues, as indicated on the
B.12
-------
facility's Survey response. EPA calculated, for each sector, the revenue-weighted average of
risk-normalized ROAs for facilities assigned to the sector. Because Survey data were available
only for Phase I Sector facilities, this variable was not calculated for the Phase II Sectors. The
revenue-weighted average of risk-normalized ROAs by sector was used as a measure of
above-normal profits in a sector, which in turn was taken as an indicator of barriers to entry and
exit.
This measure does not state that MP&M industries face high or low barriers to competition in
absolute terms; it only assigns them relative rankings. Above-median profits indicate sectors with
above average market power and the likely presence of entry and exit barriers.
These six items assign to each sector a cost pass-through score based on the number of structural
explanatory variables that suggest a relatively higher cost pass-through potential among the 15 Phase I and
Phase II MP&M industry sectors. Whether the score for a sector indicates higher or lower cost pass-
through potential depends on the comparison of the sector's value for a variable with the median value of
the variable, and the conceptual significance of higher or lower numerical values for the variable relative to
the median. That is, for some variables (e.g., industry concentration), higher numerical values indicate
greater cost pass-through potential, while for other variables (e.g., specialization ratio), higher numerical
values indicate lower cost pass-through potential. Thus, for some variables, values that are higher than the
median indicate greater relative cost pass-through potential, and, for others, values that are higher than the
median indicate lower relative cost pass-through potential. For the first five structural variables, the median
values used in these comparisons are the medians over the 15 Phase I and Phase II sector values. Because
the sixth structural variable, risk-normalized ROA, could be calculated for only the 7 Phase I sectors, the
median value used in the comparisons for this variable is the median of risk-normalized ROA values
calculated over the Phase I facilities sampled in the Survey. Each variable for a sector with a value that,
relative to the median, indicates greater cost pass-through potential receives a score of+1 and each variable
for a sector with a value that indicates lower cost pass-through potential receives a score of -1. The sector
at the median is assigned a score of 0. Table B-2 summarizes the specific scoring definitions for each
variable.
B.13
-------
Table B-2: Summary of Scoriog Rules for Assessme&t of Belative
Pass-Through Potential Based on Market Structure Considerations*
Variable
8-Firm Concentration Ratio (CRg)
Specialization Ratio (SR)
Ratio of Imports to Shipments (M)
Ratio of Exports to Shipments (X)
Average Growth Rate of Shipments (G)
Risk-Adjusted Pre-Tax Return on
Assets (TI)
Variable Indicates
Greater Pass-Through
Potential (Score +1}
Greater than median
Lower than median
Lower than median
Lower than median
Greater than median
Greater than median
Variable Indicates
Lower Pass-Through
Potential (Score -1)
Lower than median
Greater than median
Greater than median
Greater than median
Lower than median
Lower than median
Variable Indicates
Neutral Pass-Through
Potential (Score 0)
Equal to median
Equal to median
Equal to median
Equal to median
Equal to median
Equal to median
•f All assessments of pass-through potential are relative among the 15 MP&M Phase I and Phase II Sectors.
Source: U.S. Environmental Protection Agency
On the basis of this scoring system, the possible scores from the market structure analysis range
from -6 to +6. These point scores based on the individual market structure variables are in turn used to
assign summary scores of structure-based pass-through potential. Sectors with a score of 2 or greater are
assigned a summary score +1, while sectors with scores of-2 or less are assigned a summary score of -1.
Sectors with scores of 1, -1 or 0 are assigned a summary score of 0.
B.4 Combining the Measures of Pass-Through Potential
The regression analysis offers an assessment of what the cost pass-through ability of each sector
appears to be. The market structure analysis yields a judgment of what the pass-through ability ought to
be. Information from both analyses contribute to the assignment of cost pass-through estimates to facilities
in each sector.
A high degree of precision cannot be achieved in estimating cost pass-through potential, whether by
the econometric estimation method or the structural analysis of markets. Accordingly, in developing the
composite measure of pass-through potential, the cost pass-through analysis methodology intentionally
blurs the numerical specificity of the analysis and works with ranges of values. The procedure for assigning
a composite score of cost pass-through potential involved three steps:
1. Define high, medium and low ranges of cost pass-through elasticity. These ranges are defined by
the cost pass-through elasticities exhibited by the top third, middle third and lower third of all
MP&M sectors, ranked by elasticity of output price. The use of the terms high, medium, and low
does not mean that some sectors have absolutely high potential while other sectors have low
potential for passing on costs. Rather, these terms only reflect the fact that some sectors are
B.14
-------
expected to be better able to pass on costs than others within the numerical range of cost
pass-through capability exhibited historically by the industries in the MP&M category.
2. Assign each sector a high or low pass-through potential based on the econometricallv estimated
value of pass-through elasticity. From the econometric estimation analysis of cost pass-through
potential, each sector was assigned a +1, -1 or 0 rating of its pass-through potential depending on
whether the estimated Ep for its MP&M sector is in the top, bottom or middle third, respectively, of
the estimated values of Ep across all sectors.
3. Assign each sector a high or low pass-through potential based on the market structure analysis of
pass-through potential. As discussed in the preceding section, each sector received a +1, -1, or 0
score based on the number of market structure considerations that indicate relatively higher or
relatively lower expected cost pass-through potential.
4. Combine the assigned pass-through potential scores from the econometric estimation and market
structure analysis techniques to yield a composite measure of pass-through potential. E . If the
sum of the structural analysis and the direct estimation scores is positive, then that sector was
assigned to the high range of observed Ep values. Conversely, if the sum is negative, it was
assigned to the low value range of Ep. When the sum is zero, the sector was assigned to the middle
range of Ep values.
Table B-3 summarizes the resulting assignments of MP&M Phase I sectors to the estimated pass-
through potential range.
B.5 Adjusting the Composite Estimate of Pass-Through Potential for Share of Output Bearing
Compliance Costs
As discussed in the introduction to this appendix, the cost effects of an effluent guideline differ
from those of an across-the-board change in the cost of a production input (e.g., energy costs). Although
cost increases for general production inputs such as energy may affect essentially all of the facilities in an
7 The "*" in the £* term identifies the cost pass-through value as that assigned to the given sector based on the
composite cost pass-through analysis and subsequent adjustment. The "*" distinguishes the cost pass-through value
from the Ep values that were estimated by sector and that form the basis for the numerical ranges of cost pass-
through potential to which MP&M sectors were assigned.
B.15
-------
Table B-3: Estimated Fas^Htseott^t ?ote»ttal>y Mp&M Sector
Combined Econometric and Structural Scores
Sector
1 Hardware
2 Aircraft
3 Electronic Equipment
4 Stationary Industrial Equipment
5 Ordnance
6 Aerospace
7 Mobile Industrial Equipment
8 Instruments
9 Precious and Non-Precious Metals
10 Shipbuilding
1 1 Household Equipment
12 Railroad
13 Motor Vehicle
14 Bus and Truck
15 Office Machine
Ecenpmetric
Estimation Secret
-1
1
-1
0
0
-1
-1
1
1
1
0
0
-1
1
0
Structural
0
0
0
-1
0
1
-1
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
Assigned Pass-
Low
High
Low
Low
Middle
Middle
Low
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
r This score is +1, 0, or -1, depending on whether the econometrically estimated cost pass-through
coefficient for the sector is in the high, middle or low end of the range, respectively. These ranges were
defined as follows:
Low = 0.773 to 0.901
Middle = • 0.907 to 0.921
High = 0.923 to 0.937
^See the MP&M Industry Profile for a detailed discussion of the derivation of structural scores.
Source: U.S. Environmental Protection Agency
industry , the cost effects of an effluent guideline are likely to be less pervasive. In particular, MP&M
facilities that do not discharge process wastewater will not incur costs as a result of efforts to comply with
the MP&M regulation. And even among those facilities that do discharge wastewater, the costs of
achieving compliance with the proposed regulation will vary in their impact on facility finances and
business operations. In general, facilities that incur little or no costs to achieve compliance with the
proposed regulation will likely serve as a competitive governor on the ability of the more heavily burdened
facilities to pass on compliance-related cost increases to customers. The precise way in which differential
incidence of compliance costs will affect compliance cost pass-through capability is not known. However,
it may be generally expected that the rate of cost pass-through will increase as the portion of the industry
that bears compliance costs increases.
Albeit with differing degrees of effect depending on the variation in energy-use efficiency among the facilities in
an industry.
B.16
-------
On the basis of this expectation, a final adjustment was undertaken to the estimated cost
pass-through coefficients to reflect the presence of facilities that are expected to bear no compliance-related
cost increases as a result of regulation. Specifically, from the analysis of Survey responses, EPA estimated
the total business revenue in each MP&M Phase I sector that is associated with water-discharging facilities
and thus likely to be affected by compliance-related cost increases. Separately, from Department of
Commerce data, EPA estimated the total revenues by MP&M facilities, regardless of discharge status. The
ratio of these values — revenues in water-discharging facilities divided by total revenues in the MP&M
sector — provided a measure of the fraction of production in the MP&M sector likely to be affected by
compliance cost increase. For each sector, the ratio was multiplied by the estimated cost pass-through
potential to yield an adjusted estimate of compliance cost pass-through potential taking into account
competition from same-industry facilities that are not expected to incur compliance-related cost increases.
Table B-4 summarizes the final adjustment to the estimates of cost pass-through potential. The
first column lists the pass-through potential value assigned to each sector before adjustment for the share
of sector output bearing compliance costs. The second column gives each sector's adjustment coefficient
(i.e., the fraction of business activity that is expected to incur compliance-related cost increases) while the
final column shows the resulting sector-level pass-through potential values that were used in the partial-
cost-pass-through analysis in the Economic Impact Analysis.
TaWe B-4; Adjured Estimates of Compliance Cost Pass-Through
Potential by Wf&M. Phase I Sector
Sector
Hardware
Aircraft
Electronic Equipment
Stationary Industrial Equipment
Ordnance
Aerospace
Mobile Industrial Equipment
Unadjusted Cost
Pass-Through
Potential
0.872
0.937
0.872
0.872
0.914
0.914
0.872
Estimated Fraction
of Revenue Subject
to Regulation
34.8%
100.0%
100.0%
39.7%
100.0%
100.0%
100.0%
Adjusted Cost Pass-
Througfa Potential
0.303
0.937
0.872
0.346
0.914
0.914
0.872
Source: U.S. Environmental Protection Agency
As shown by the table, the fraction of business activity to which the regulation is expected to apply
varies considerably by sector. The Survey data indicate, for Aircraft, Electronic Equipment, Ordnance,
Aerospace, and Mobile Industrial Equipment, that essentially all of the business operations within the
sector will be subject to regulatory effects. However, for Hardware and Stationary Industrial Equipment,
the fraction of business operations within the sector expected to incur compliance costs is much smaller.
Note that the estimates of fraction of revenue within a sector that are expected to incur compliance costs
B.17
-------
are based on sample Survey data that has been extrapolated to the level of the sector using facility sample
weights. These results are necessarily subject to statistical error. The resulting adjusted cost pass-through
potential values also vary quite broadly from a low of 0.303 for Hardware to a high of 0.937 for Aircraft.
In addition, note that these values are elasticity values — that is, the percentage change in output revenues
for a percentage change hi input prices — and are not cost pass-through fractions — that is, the fraction of
compliance-related cost increase expected to be recovered from customers through increased revenues. The
use of the elasticity values in the Economic Impact Analysis to calculate cost pass-through fractions is
described in the last section of this appendix.
B.6 Using the Estimated Cost Pass-Through Potential in the Facility-Level Financial Analysis
The analysis of cost pass-through potential yielded an estimate (and range) of the cost elasticity of
price, E*, for each MP&M Phase I sector and for each sample facility depending on the sector from which
each facility reported receiving the greatest share of revenue. The facility-level financial analysis uses the
elasticity value, £*, to estimate the share of effluent guidelines compliance cost that a facility passes on to
its customers as increased prices and, with output quantity constant, increased revenue.
As described earlier in this appendix, the gross capital and annual operating costs of compliance
for a facility (TIC and ACC, respectively) were derived from the cost estimates provided by the engineering
analysis. Capital costs, which were estimated on a one-time outlay basis, were translated into an annual
charge by distributing the total capital cost in equal parts, undiscounted, across the assumed life of the
capital equipment (15 years), and adding the annual interest expense associated with that capital
expenditure, based on the facility's cost of capital.
Tlc.an =
15
Where:
= Annual capital charge
= Total capital cost of compliance
= Facility cost of capital
Thus, the total cost increase that a facility would incur as the result of guidelines compliance is the sum of
annual operating costs plus the annual capital charge, ACC + TIc>an.
TIC
r
B.18
-------
Recalling that E* is an elasticity value (i.e., the percentage change in revenue for a percent change
in production costs), the relationship defining the change in revenue associated with the incurring of
compliance costs is as follows:
Where:
AR
E*
ACC
TIc,an
TCpo
AR =
(ACc + Tlc,an)
TCpc
xRi
pc
Change in revenue from pre-compliance or baseline revenue
Cost pass-though potential
Annual operating cost of compliance
Annualized charge for capital cost of compliance
Total facility costs, pre-compliance
Facility revenues, pre-compliance.
To calculate the increase in revenue that may be expected to accompany the increase in cost
requires a measure of the facility's pre-compliance, or baseline, total cost, TCpo. Total cost was calculated
as the sum of all costs reported on each sample facility's income statement from the Survey, including all
ordinary facility operating costs plus an allowance for capital consumption including depreciation and
interest payments on debt. This accounting of total pre-compliance costs excludes the cost of equity capital
and is therefore consistent with the accounting for the annualized charge for the capital cost of compliance
as noted above.
From the preceding calculations, it is possible to calculate a pass-through factor, a, defined as the
fraction of annual compliance costs that the facility would receive in increased revenue. The pass-through
factor is as follows:
a =
All variables are as defined as above.
(ACc + Tlc,an)
TCpc
The cost pass-through factor, a, for a given facility is calculated from the E* value for the sector
to which the facility is assigned and the facility's pre-compliance revenue and cost values obtained from the
B.19
-------
r
facility's §308 Survey response. The revenue and cost values are the average of values reported by the
facility expressed in 1989 constant dollars. As a result, a varies over the facilities within a sector based on
each facility's pre-compliance revenue and cost structure. Table B-5 lists the sample-weighted average cost
pass-through factors, a, for the facilities in each MP&M Phase I sector.
Average Pass-Through Fractions by
MP&M Phase I Sector
Sector
Hardware
Aircraft
Electronic Equipment
Stationary Industrial Equipment
Ordnance
Aerospace
Mobile Industrial Equipment
Pass-Throush FractioB
0.288
0.945
0.898
0.359
0.933
0.970
0.914
Source: U.S. Environmental Protection Agency
These values indicate that, on average, facilities in the Hardware and Stationary Industrial
Equipment sectors are expected to pass on to customers considerably smaller shares of compliance costs
than are facilities in the Aircraft, Electronic Equipment, Ordnance, Aerospace, and Mobile Industrial
Equipment sectors.
B.20
-------
Appendix C
Timing of Metal Products and Machinery Economic Impact Analysis
Relative to U.S. Business Conditions
C.I Introduction
Facilities in the MP&M Phase I Survey were asked to provide financial data for their fiscal years ending
in 1987,1988, and 1989. This appendix analyzes whether the timing of this data sample relative to the recession
that began in 1990 could cause difficulties in our analysis. If the Survey data had been gathered for a period in
which the economy — and manufacturing sectors, in particular ~ were in recession, then this economic impact
analysis might show the MP&M industries to be in abnormally weak financial condition. As a result, the analysis
might overstate the financial burdens associated with the capital requirements and expenses of effluent limitations
guidelines. Conversely, performing the analysis on data from abnormally good years would underestimate the
financial burden on industry and overstate industry's ability to pay.
To address this issue, this appendix presents results from an analysis of the condition of the economy
generally and the MP&M sectors in particular over the 11 -year period, 1979-1989. This analysis shows that the
MP&M data were gathered during a period of relatively stable growth that is likely to be characteristic of the
long-run sustainable performance of the economy and, generally speaking, the MP&M industries as well. The
period 1987-1989 is a period of neither economic boom nor economic bust. On closer inspection of MP&M
sector data, the economic weakness that became economy-wide by late 1990 appears to have arrived a bit earlier
in some of the MP&M sectors. However, for all of the Phase I sectors except Ordnance, the MP&M data
collection period includes at least two years of healthy performance preceding the recession. Inadequate data were
available to evaluate performance in the Ordnance sector.
C.2 Growth in Gross Domestic Product, 1979 to 1989
Over the period 1979-1989, real gross domestic product (GDP) grew at an average annual rate of 2.5
percent.1 In 1980 and 1982, year-to-year growth from the prior year was negative. As the economy began its
recovery from the relatively severe recession of 1981-82, the GDP growth rate rose rapidly in 1983 and peaked
1 GDP data were deflated to 1982 dollars by the GDP deflator.
C.I
-------
in 1984 at 6.3 percent For the next five years, 1985-1989, the GDP growth rate averaged a moderate 3.1 percent
and showed little year-to-year variation, ranging from a low of 2.6 percent in 1989 to a high of 3.9 percent in
1988.
Table C-l, Comparison of Annual Growth in Gross Domestic Product and Shipments from MP&M
Sectors, and Figure C-l, Annual Percentage Growth in Real Gross Domestic Product and Shipments from
MP&M Sectors, summarize the growth rate of GDP both numerically and graphically over the period 1979-1989.
The yearly growth rates span a period of 11 years with the growth rate reported for a given year being calculated
on the basis of the change from the preceding year (i.e., the 1980 growth rate is based on the change in real GDP
from 1979 to 1980).
Table
Gross Domestic Product
Value of Shipments,
selected MP&M sectors
-0.6% 1.7% -2.2% 3.9%
-9.6% -0.7% -4.1% 13.4%
6.3% 3.1% 3.0% 3.1% 3.9% 2.6%
15.8% 4.6% 4.7% 1.9% 4.0% 1.8%
Summary Statistics olt
Growth Rates
Gross Domestic Product
Value of Shipments, selected
MP&M sectors
Mean Max. Min. StdDev.
2.5% 6.3% -2.2% 2.3%
3.2% 15.8% -9.6% 7.1%
Mean Max.
3.2% 3.9%
2.6% 4.0%
Min. Std. Dev.
2.6% 0.5%
1.8% 1.0%
Sources: The Economic Report of the President, U.S. Industrial Outlook, Statistical Abstract of the United
States fvarions years') and Abt Associates Tnc
C.2
-------
Figure C-l
Annual Percentage Growth in Real Gross Domestic Product and Shipments from MP&M Sectors
ao.0%-
5.0%-
0.055-
a, -5.0%-
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989
MP&M Shipments —'— GDP, Real
Sources: The Economic Report of the President, U.S. Industrial Outlook, Statistical Abstract of the United States, and
Abt Associates Inc.
C.3 Growth in MP&M Shipments, 1979 to 1989
The principal gauges of the MP&M sectors performance during this period included value of shipments
data from the U.S. Industrial Outlook and the Statistical Abstract of the United States. As much as possible,
these data were collected for the same sectors as those represented in the MP&M data sample.2 The data were
deflated to 1982 using the GDP deflator and annual percentage growth rates were calculated. The yearly growth
rates were weighted by each sector's share of total MP&M shipments (by year) and summed across sectors to
yield a comprehensive index of change in production in the MP&M sectors.3 Exhibits 1 and 2 report the year-to-
year growth rates for this data series. These data show that the pattern of MP&M shipments generally matches
2 Data were not available for the Ordnance sector. In addition, data for the Railroad Equipment and the Bus and Truck
sectors were not available for all years.
3 Growth rates were calculated for individual sectors instead of the sum of sectors because data were not available for
all years for all sectors. In addition, we wanted to look at growth in shipments by sector as well as in aggregate.
C.3
-------
that of the economy as a whole, although with somewhat higher volatility (see Exhibits 1 and 2).
The average growth rate in the MP&M sector series for 1979-1989 is 3.2 percent, which is modestly
higher than the 2.5 percent average growth rate for real GDP. hi addition, the swing in growth rates from the
1981-82 recession to the 1983-84 recovery is substantially greater for the MP&M series, which is consistent with
the cyclicality of many of the MP&M sectors. However, by 1985, the growth in the MP&M series stabilizes at
nearly the same level as GDP growth. Although the MP&M series displays greater volatility than GDP over the
final 5 years, 1985-1989, the variation remains relatively narrow, hi the three years that match the MP&M
survey data, 1987-1989, MP&M shipments growth averages 2.6 percent, or just under the 3.2 percent for the
economy as a whole. On balance, (1) the close alignment of the GDP data and the aggregate MP&M series in
1987-89 and (2) the relatively stable and moderate growth of GDP during this same period suggest that the
MP&M data may be viewed as generally indicative of the long-term, sustainable financial performance of the
MP&M industries.
Table C-2, Real Annual Growth Rate of MP&M Shipments by Sector, 1980-1989, presents a slightly
finer look at the MP&M series data. On a sector-by-sector basis, it appears that some of the MP&M sectors
encountered economic weakness earlier than the official 1990 start date for the current recession. Specifically,
the following eight sectors each experienced one year of negative real growth in the period, 1987-89:
• Phase I: Aerospace, Aircraft, Hardware, and Mobile Industrial Equipment. For the Aircraft and
Mobile Industrial Equipment sectors, the negative growth values are a very modest -1.5 percent
and -0.5 percent, respectively. The negative growth values for the Aerospace and Hardware
sectors are somewhat more substantial at -11.0 percent and -4.7 percent respectively.
• Phase II: Household Equipment, Office Machine, Railroad and Precious Metals.
One sector, Shipbuilding, experienced negative growth in all three years.
C.4
-------
MP&M
Sector
SIC
V«ar
1988 1981 1982 1983 1984 19SS 1986 1987 1988 1S89
Phase I Sectors
Aerospace 3761,4,9* 1.5% 4.1% 15.9% 0.3% 30.7% 26.2% 9.2% 6.1% -11.0% 1.1%
Aircraft
3721,4,8* 4.8% 0.5% -1.9% 15.1% -8.7% 12.7% 11.5% 7.1% -1.4% 1.3%
Electronic Eq 366,7 3.2% 0.4%
Hardware 34 -12.0% -3.8%
Mobile IndEq 3531* -15.0% -5.1%
Stat. IndEq 361,2 -8.4% -0.7%
Ordnance 348
4.4% 9.5%
-10.2% 4.6%
-32.2% -12.9%
-8.8% -3.8%
22.1%
10.3%
20.7%
13.5%
3.0%
2.3%
0.4%
-0.4%
4.8%
2.5%
-1.2%
3.3%
5.0%
-4.7%
1.5%
2.6%
5.8%
3.0%
1.8%
2.9%
Data not available
0.4%
7.5%
-0.5%
2.8%
Phase n Sectors
Bus & Truck 3713,6*
Household Eq 363
Instruments 38
Motor Vehicle 371
Office
Machine
Metals
Railroad
Shipbuilding
357
3911*
3743*
3731*
-12.6%
0.6%
-31.5%
4.8%
-8.3%
-1.0%
1.1%
5.4%
-10.0%
-5.4%
-6.6%
4.1%
-3.8%
21.8%
-7.0%
33.9%
12.6%
48.2%
7.1%
31.8%
15.5%
27.0%
1.5%
-1.0%
2.3%
4.7%
3.8%
-4.0%
6.3%
5.2%
5.4%
-2.0%
7.2%
5.7%
5.2%
0.2%
1.4%
1.8%
-2.9%
4.8%
7.4%
7.1%
2.1%
1.2%
1.2%
-1.7%
-10.8% -6.4% 0.8% 25.3% -17.6% -3.5% 10.4% 27.0% 1.0% -0.5%
-10.3% 7.5% -2.5%
3.9% -2.9% 8.1% -2.0% -14.6% -2.5% 4.8% -3.6% -6.6% -42.4%
The italicized boldface values (e.g., -3.6%) indicate negative growth in the three years of the MP&M data gathering
period. Asterisks (*) indicate that shipments data were obtained from the U.S. Industrial Outlook. Other shipments data
are from Statistical Abstract of the United States.
Source: U.S. Industrial Outlook, Statistical Abstract of the United States, and Abt Associates Inc.
Of those sectors experiencing negative growth in 1987-1989, none in the Phase I regulatory analysis
experienced more than one year of negative growth. Accordingly, at least two years of non-recessionary financial
data was available for the analysis of the Phase I sectors.4 Some firms that will have regulatory costs may have
experienced relatively poor financial performance during one year of the 1987-89 period. Using the average of
the three years of data in the impact analysis diminishes the contribution from a single bad year.
4 An appropriate shipments data series for the Ordnance sector could not be identified, so this finding does not apply
to Ordnance, on the basis of this analysis. However, a separate statistical analysis of differential financial performance
of facilities in the MM&R dataset found that participation in the Ordnance sector was associated with higher profitability,
as indicated by pre-tax return on assets. This finding suggests that the Ordnance sector may have outperformed the other
MM&R sectors during the 1987-1989 period.
C.5
-------
-------
Appendix D
Statistical Analysis of Financial Measures
for Metal Products and Machinery Industry Facilities
D.I Introduction
This appendix presents the methodology and results associated with regression analyses performed to
test whether the financial performance of Metal Products and Machinery Industry (MP&M) facilities varies in
a statistically significant way based on the following descriptive variables relating to the nature and scale of a
facility's business:
• The MP&M Phase I business sectors from which facilities receive revenue;
• The extent of participation in MP&M Phase II business sectors;
• The customer types from which facilities receive revenue;
• The MP&M business functions from which facilities receive revenue; and
• The size of the facility as measured by gross revenues.
The findings from this analysis suggest that financial performance is not generally related to the
descriptive variables. In a few of the analyses performed, one or two descriptive variables exhibited a statistically
significant relationship to a financial performance measure. However, only for one descriptive variable — the
share of revenues received from rebuilding activities — was a significant relationship found for the majority of
financial measures for which regression models were tested.
D.2 Structure of Analysis
The analysis involved performance of ordinary least squares regressions on facility data gathered by the
MP&M Survey. The regression analysis tests the statistical significance between the financial performance
measures, which are used as dependent variables, and the facility descriptive data, which are used as independent
variables. Below, we explain the measures of financial performance used as dependent variables, the facility
descriptive information used as independent variables, and the structure of the regression models tested.
Measures of Financial Performance Used as Dependent Variables
The analysis uses five measures of financial performance:
D.I
-------
After-Tax Cash Flow Margin (or ATCF/Rev), which measures the cash
generating ability of a facility's lines of business: the higher the cash flow margin,
the more profitable, in terms of cash generating ability, is the facility's business.
The cash flow margin is calculated by dividing cash flow by gross revenue. Cash
flow is defined as total cash revenue less all cash costs, including taxes and
interest or:
ATCF = REV - (FC + OC + T +1);
REV = Total Facility Revenue;
FC = Total Fixed Costs, including fixed overhead, research and
development, and other expenses (Survey data items);
OC = Total Operating Costs, including material and product costs,
labor costs, costs of contract work, and other costs (Survey data items);
T = Total Federal, State and Local Income Taxes: and
I = Interest Expense.
Cash flow margin is used instead of after-tax profit margin because after-tax
profit includes depreciation, a non-cash item, as a cost. Cash flow is a superior
measure of financial performance and a more important determinant of the likely
ability of facilities to withstand the financial impacts of an effluent guideline.
Normalization of cash flow by dividing by revenue allows the measure to be
interpreted as a margin, eliminates the linear scale effect of revenue on cash flow,
and permits testing of statistical hypotheses regarding differences in margin
associated with different revenue sources. This variable, as well as those that
follow, was computed using the average of values reported by a facility after
deflating to real 1989 dollars (explained in the next major section, Data Used in
the Analysis).
Going Concern Premium Relative to Revenue (or Prem/Rev), which measures
the extent to which a facility's value as a going concern exceeds its value in
liquidation normalized by revenue. The going concern premium is another
measure of the facility's staying power in the face of an effluent guideline
D.2
-------
regulation: if the going concern premium becomes negative — that is, the facility
is worth more in liquidation than as a going concern — then a facility's
management is more likely to decide to cease operations instead of undertake the
treatment program investments needed for compliance with an effluent guideline.
Normalizing the going concern premium by dividing by gross facility revenue
removes the expected linear scale effects of revenue on going concern premium
and allows the going concern premium to be interpreted in a manner analogous to
the cash flow margin. For example, statistical tests may be performed on the
measure to understand whether some sources of revenue (e.g., MP&M sector or
customer type) have inherently higher premiums relative to revenue.
Prem/Rev is calculated by subtracting the facility's estimated liquidation value
from the discounted cash flow valuation and dividing by gross revenue.
Liquidation value and going concern value are calculated as explained in Facility-
and Firm-Level Financial Impact Analyses for Metal Products and Machinery
Industries Study (February 4,1993).
3. Going Concern Premium Relative to Assets (or Prem/Assets), which measures
the going concern premium (defined above) normalized by the gross book value
of the facility's assets. Normalizing by assets again eliminates the linear scale
effect of assets on going concern premium (i.e., the larger the assets, the larger the
going concern the premium), and allows the going concern premium to be
interpreted in a manner similar to a return on assets. That is, facilities with more
productive and profitable assets should have a higher going concern premium
relative to assets. Statistical hypotheses may be tested concerning the differential
profitability of revenues sources.
Prem/Assets is calculated by dividing the going concern premium by facility total
assets.
4. Pre-Tax Return on Assets (or PTRA), which measures the fundamental
profitability of a facility's assets and is calculated as pre-tax, pre-interest
D.3
-------
operating cash flow (or net operating income) divided by facility total assets. The
pre-tax, pre-interest operating cash flow is defined as:
NOI = REV - (FC + OC)
NOI = Net Operating Income;
REV = Revenue;
FC = Total Fixed Costs; and
OC = Total Operating Costs.
5. Interest Coverage Ratio (or ICR), which measures a facility's ability to meet
interest payment obligations out of operating cash flow. ICR is calculated as pre-
tax, pre-interest operating cash flow or Net Operating Income, as defined above,
divided by interest payments.
Facility Descriptive Information Used as Explanatory Variables
The regression analysis tests whether and how the financial performance measures vary in a statistically
significant way with information on the composition of a facility's revenues and facility size. The explanatory
variables used in the analysis fall in four categories:
1. Composition of Revenue by MP&M Business Sector and Phase. These
variables describe the share of total MP&M revenue in each Phase 1 sector and
in the total of Phase 2 sectors, as follows:
SHARE_1 Share of MP&M revenue from Hardware;
SHARE_2 Share of MP&M revenue from Aircraft;
SHARE_3 Share of MP&M revenue from Electronic Equipment;
SHARE_4 Share of MP&M revenue from Stationary Industrial Equipment;
SHARE_5 Share of MP&M revenue from Ordnance;
SHARE_6 Share of MP&M revenue from Aerospace;
SHARE_7 Share of MP&M revenue from Mobile Industrial Equipment;
and
D.4
-------
PHASE2
Share of MP&M revenue from Phase 2 sectors.
2. Composition of Revenue by MP&M Function. These variables describe the
share of total MP&M revenue by MP&M business activity, as follows:
SHARE_M Share of MP&M revenue from Manufacturing;
SHARE_R Share of MP&M revenue from Rebuilding; and
SHAREJT Share of MP&M revenue from Maintenance.
3. Composition of Revenue by Customer Market Type. These variables describe
the share of total MP&M revenue by customer market, as follows:
SHAREJD Share of MP&M revenue from domestic, non-government sales;
SHARE_G Share of MP&M revenue from government sales; and
SHAREJE Share of MP&M revenue from export, non-government sales.
4. Facility Scale. The facility scale variable used in this analysis is total facility
revenue, in thousands of dollars.
Models Tested
Each of the five dependent variable/performance measures was tested using three linear regression
models. The three models differed only in the number of classes of explanatory variables included in the model.
For each of the explanatory variable classes specifying a composition of revenue (e.g., MP&M sector share of
revenue), it was necessary to remove one revenue share variable to prevent perfect collinearity in the explanatory
variable matrix. Accordingly, the excluded variable in each variable class is captured in the estimated intercept
and the coefficients for the revenue composition variables that are explicitly included in the models are interpreted
as the deviations from the revenue structure defined in the intercept. The three models tested are as follows:
1. DEP VAR = « + p2SHARE_2 +... + P?SHARE_7 + P,PHASE2 + p 13REVENUE
2. DEPVAR= «+ p2SHARE_2 + ...+ p,SHARE_7+ p8PHASE2+ p9SHARE_R
+ p]0SHARE_T+ p,3REVENUE
D.5
-------
3. DEPVAR= a + p2SHARE_2 + ... + p 7SHARE_7 + psPHASE2 +
PsSHARE_R + p,0SHARE_T + P,,SHARE_G+ p,2SHARE_E +
P,3RE VENUE.
The excluded variables from each revenue composition measure are as follows:
Composition by MP&M Sector: SHARE_1, or share of revenue from hardware
Composition by MP&M Function: SHARE_M, or share of revenue from manufacturing
Composition by Customer Market Type: SHARE_D, or share of revenue from domestic,
non-government sales.
Accordingly, in the first model, the intercept is defined to reflect a facility with 100 percent of its MP&M
revenue from the hardware sector. When divided by 100, the coefficients estimated for the other revenue share
variables indicate the expected marginal change in the given dependent variable resulting from a one percentage
point increase in the share of revenue from the particular sector and an offsetting one percentage point reduction
in the revenue share from the hardware sector. If the hypothesized exchange of revenues is with a sector other
than that reflected in the intercept, then the marginal change in the dependent variable is calculated by subtracting
the estimated coefficient value for the "giving-up" sector from the value estimated for the "going-to" sector. In
the second model, the intercept reflects the expected performance of a facility with 100 percent of its MP&M
revenue from manufacturing activity in the hardware sector. And in the third model, the intercept reflects the
expected performance of a facility with 100 percent of its MP&M revenue from domestic, non-government sales
of manufacturing production in the hardware sector.
The linear relationships of revenue shares for the three different breakdowns of MP&M revenue may be
interpreted as a kind of portfolio model in which the different sources of revenue — by sector, business activity,
or customer market—are hypothesized as possibly having different financial performance characteristics. The
model allows for linearly combining the revenue shares in varying combinations with resulting variations in
financial performance as reflected in the dependent variables. The regression analysis tests the statistical
significance and direction of the marginal effects on financial performance resulting from differential blending
of the revenue components.
The inclusion of the revenue variable tests for the effect of facility size on the various financial
performance measures. Because the dependent variables are, in effect, already normalized for a scale effect —
that is, by dividing an absolute dollar measure of financial performance by revenue or assets — the revenue
variable tests for a second order or non-linear effect on the absolute measure of financial performance in the
numerator of the financial performance measure.
D.6
-------
D.3 Data Used in the Analysis
The data used in the analysis are clean observations from the MP&M Data Collection Portfolio database.
A maximum of 647 observations were used in any regression. Data used in the computation of the various
independent and dependent variables were deflated to 1989 using the Producer Price Index series from the
Department of Commerce. For analyses in which the dependent variable could not be meaningfully calculated
(e.g., the interest coverage ratio for observations in which interest expense is zero), the number of observations
used in the analysis is less than the maximum available.
Two sets of analyses were performed using the data. The first used all observations for which the
variables could be calculated. Then, to provide an analysis in which the "tails" of the distributions would have
less effect on the analytic findings and the "core" of the distributions would be given more weight, a second
analysis used a data set in which the observations in the tails of the dependent variable distributions were
excluded from the regressions. Specifically, for all dependent variables but interest coverage ratio, the top and
bottom one percent of observations were excluded from analysis. The interest coverage ratio variable exhibited
a much larger share of "outlier" type observations at the upper tail of the distribution because of facilities that
reported very little, but still positive, interest expense. Accordingly, for the interest coverage ratio analysis, the
top 10 percent of the distribution was excluded from analysis in addition to the bottom 1 percent. Table D-l,
Descriptive Statistics of Dependent Variables, Measures of Financial Performance, presents summary statistics
for the five dependent variables.
D.4 Findings
Three model formulations were tested for each of the five dependent variables. Table D-2, Regression
Analysis of Financial Measures, summarizes the results for Model 3, which includes all three sets of revenue
classification variables. These results .are for the data sets with observations in the tails excluded, as discussed
above. Analytic results were stable over the three different models: that is, the significance of coefficients did
not change as new variables were added to the model. In addition, Model 3 generally yielded slightly higher
explanatory power as indicated by the adjusted R-squared term.
D.7
-------
Table IM* Descriptive Stafisfics-ef Bepenifent Varfs*fes, Mysore* of Fin«n«jai Performance
CwfoFlowJ
JS^T^"
ViSHSj»
'-^~-'»«5"«
x^ '*•$•&
^tt^fiftyf^Ar.
m*&
DeDcadcnt Variable*
•OTSSSw/
•$«tag Concern
_ Premiura Relative ,, ,'„." ' .'" ""
™<^ «", f"f& ' ^ w" ' <• ™ '
T""'
, !; "
Tn:f ttKAtft' fl/WAftttMto*.
•&& &tHk "l
41.161
8.732
3.914
2.479
1.308
0.568
-0.077
-0.955
-2.032
-10.829
-13,408.8
645
-20.263
528.0
''-•"•TaST*
flailed
8.597
7.028
3.498
2.224
1.297
0.568
-0.070
-0.843
-1.640
-4.195
-9.325
631
0.676
1.791
'•*•"'"•'
H<*bfc i
5.009
1.692
0.677
0.437
0.269
0.158
0.075
-0.014
-0.110
-0.751
-3.042
645
0.208
0.448
Tallsi
itatedsd
1.575
1.178
0.619
0.421
0.267
0.158
0.077
0.003
-0.090
-0.322
-0.701
631
0.195
0.241
'^JaWy/
5,488.81
1,715.17
268.36
91.97
19.06
6.00
2.31
-0.27
-3.23
-178.90
-3,225.38
530
74.569
435.6
":"• '•••/ •*
Tails-
*fjf*
Es^eltt4e4
91.01
81.06
52.25
31.35
11.40
5.18
2.09
-0.22
-2.50
-28.94
-103.75
471
10.311
18.735
Source: Abt Associates Inc.
Note: Numbers of observations before exclusion of "tails"
differ among variables because of elimination
of observations with
7ero in the denominator.
As would be expected, the analytic precision of the results improved when using the data sets with tail
observations excluded from the analysis. Overall explanatory power as indicated by R-squared was very low
for both sets of regressions but was typically an order of magnitude higher with the tail observations excluded.
The tail-excluded data sets have substantially lower variance than the unadjusted data sets and should be more
likely to reveal systematic relationships among revenue source classifications and financial performance, if any
are present Thus, the use of the lower variance data sets should provide a more conservative test of the presence
of systematic relationships.
As noted above, the overall explanatory power of these models is very low. R-squared values range from
0.0292 to 0.0342, meaning that, on the basis of the linear regression analysis, the information contained in the
explanatory variables accounted for no more than 2.92 percent to 3.42 percent of the observed variation in the
dependent variables. Apart from significant intercept terms, the regressions yielded significant coefficients at
the five percent level for only three variables. However, only one of these three variables was found to be
significantly related to more than one of the dependent variable measures of financial performance. The
significant variable findings are as follows (Table D-2):
D.8
-------
Explanatory Variable
ATCF/Rev
Dependent Variables:
Prem/Rev Prem/Assets PTRA
ICR
Intercept
0.080481
(10.522)
0.270163
(3.406)
0.732628
(4.967)
0.223557
(11.300)
10.367154
(5.887)
Percent of Revenues by MP&M Sector/Phase
Aircraft
-0.019615 -0.201014 -0.530968 -0.085450 3.154896
(-1.061) (-1.050) (-1.489) (-1.783) (0.732)
Electronic Equipment
-0.013465
-0.145054
-0.138601
-0.016402
3.819412
(JL108)
Stationary IndEquipment 0.012267 O.183947 0.186096 0.001443 -1.673563
(1.124) (1.625) (0.885) (0.051) (-0.662)
Ordnance
Aerospace
0.004760
JP_.198)__
0.037033
(1.653)
0.265910
_(JL069)__
0.340345
(1.467)
1.008074
0.068421
_(1L099)
-0.014768
(-0.254)
3.807509
0.128225
(0.297)
1.996879
(0.363)
Mobile Ind'l Equipment -0.013397 0.016473 -0.048515 -0.006278 -1.415926
(-0.766)_ (0.091;) ^Cj0j_43)_______(_-pj_39)_______(_-p.3_5q)___
'Total Phase 2 Participation -0.006774 -0.144087 -0.112912 -0.036156 -3.608486
(-0.512) (-1.048) (-0.442) (-1.051) (-1.145)
Percent of Revenues by MP&M Function
Rebuilding
-0.026600 -0.525000 -1.007300 -0.168400 1.693400
(-1.051) (-2.043) (-2.065) (-2.566) (0.268)
Maintenance
0.026800
(0.989)
0.321000
(1.146)
0.474300
(0.904)
0.046700
(0.662)
0.035300
(0.006)
Percent of Revenues by Customer Type
Government
-0.030200 -0.230100 -0.194200 -0.057600 -8.704600
(-1.796) (-1.323) (-0.597) (-1.319) (-M??L_
Exports
-0.00675900
(-0.308)
-0.055800
(-0.245)
-0.350100
(-0.819)
-0.089100
(-1.562)
6.256700
(1.239)
Total Facility Revenue
-1.54815E-8 -6.21444E-8 3.802510E-8 4.313723E-8 0.000009779
Number of Observations
R-squared
633
0.0301
633
0.0342
631
0.0299
631
0.0338
471
0.0292
Adjusted R-squared
0.0113
0.0155
0.0111
0.0151
0.0038
ATCF/Rev = After-Tax Cash Flow Margin (After-Tax Cash Flow/Revenue)
Prem/Assets = Going Concern Premium Relative to Total Assets (Going Concern Premium/Total Assets)
Prem/Rev = Going Concern Premium Relative to Revenue (Going Concern Premium/Revenue)
PTRA = Pre-Tax, Pre-Interest Return on Assets (Operating Cash Flow/Total Assets)
ICR = Interest Coverage Ratio (Operating Cash Flow/Interest Expense)
Source: Abt Associates Inc.
1. The Ordinance share of MP&M revenues was found to have a significant, positive relationship
with the dependent variable, Going Concern Premium Relative to Assets. The value of the
coefficient, 1.008, suggests that each one percentage point exchange in revenue share from the
Hardware sector to the Ordnance sector results in an expected improvement of 0.01008 in
D.9
-------
Prem/Assets. The coefficients for the Ordinance share of revenue were not significant in any
of the other dependent variable analyses.
2. The Rebuilding share of MP&M revenues was found to have a significant, negative
relationship with three of the dependent variables: Going Concern Premium Relative to
Revenue, Going Concern Premium Relative to Assets, and Pre-Tax Return on Assets. The
Rebuilding share of revenues was not found to be significantly related to After-Tax Cash Flow Margin
or Interest Coverage Ratio. The estimated coefficient values and their numerical interpretations
are: (Table D-3):
l)ependenty«ri»Me eoefifcient
Going Concern Premium -0.5250
Relative to Revenue
Going Concern Premium -1 .007300
Relative to Assets
Pre-Tax Return on Assets -0. 1 684
Source: Abt Associates Inc.
Regression Results "" „,„„«„+„,, ,
, Example Ijtrterprciatwrt for 9 ¥en l*cre«jrtag<;
Poiai Swing in Revenue Share
Ten percentage point exchange from
Manufacturing to Rebuilding yields expected
reduction of 0.0525 in Prem/Rev.
Ten percentage point exchange from
Manufacturing to Rebuilding yields expected
reduction of 0.1 0073 in Prem/Assets.
Ten percentage point exchange from
Manufacturing to Rebuilding yields expected
reduction of 0.01684 in PTRA.
3. The Government share of MP&M revenues was found to have a significant, negative
relationship with the dependent variable Interest Coverage Ratio. The value of the coefficient,
-8.704600, indicates that for each one percentage increase in the government share of revenues
(and offsetting reduction in the domestic, non-government share), the interest coverage ratio is
expected to decline by .087046.
Because the significant coefficients on the Ordnance and Government shares of revenues were each
found in only one regression model tested, there is little basis for concluding that these variables are
systematically related to the financial performance of facilities in the Survey data set and, accordingly, then- likely
ability to manage the financial burdens of an MP&M effluent guideline. However, the finding of a significant,
negative relationship between the Rebuilding share of revenues and three of the five financial performance
measures tested may be interpreted as a somewhat stronger indicator of weaker financial condition in facilities
relying more on rebuilding activities as a source of revenue.
D.10
-------
Notably, the revenue coefficients were not significant in any of the analyses, implying that size of facility,
as indicated by revenue, is not a statistically significant determinant of financial condition.
D.ll
-------
-------
References
Automotive Industries (1992). Detroit's Struggle To Control Costs. December, 1992.
Business Week (1993). Stuck! How Small Companies Cope When They Can't Raise Prices.
Nvember 15,1993.
Dun's Marketing Services, Inc. (1991 ). Million Dollar Directory. New Jersey.
Fin ancial Accounting Standards Board. Statement of Financial Accounting Standards No. 89,
Financial Reporting and Changing Prices. December 1986, Stamford, Connecticut.
Haley, Charles W. and Schall, Lawrence D., The Theory of Financial Decisions. McGraw-Hill,
New York, 1979.
Hardware Age (1988). Industry Outlook, 1990 to 1995. September, 1988.
Hardware Age (1990). Retail Update. December, 1990.
Hardware Age (1992). 1992 Consumer Profile. December, 1992.
Hardware Age (1992). Distribution Update IX. October, 1992.
Robert Morris Associates (1991). 1991 Annual Statement Studies. Philadelphia, Pennsylvania.
Robert Morris Associates (1993). 1993 Annual Statement Studies. Philadelphia, Pennsylvania.
Semiconductor International (1993). Forecast'93. January, 1993.
U.S. Department of Commerce, Bureaus of the Census (1984-1993). Statistical Abstract of the
United States. Washington, D.C., Annual.
U.S. Department of Commerce, Bureaus of the Census (1987). Concentration Ratios in
Manufacturing. Washington, D.C.
U.S. Department of Commerce, Bureaus of the Census (1987). Enterprise Statistics.
Washington, D.C.
U.S. Department of Commerce, Bureaus of the Census (1988-1991). Annual Survey of
Manufactures. Washington, D.C., Annual.
U.S. Department of Commerce, Bureaus of the Census (1990). 1987 Census of Manufactures.
Washington, D.C.
U.S. Department of Commerce, International Trade Administration (1987-1992). U.S. Industrial
Outlooks. Washington, D.C., Annual.
U.S. EPA (1991). Economic Impact Analysis of Proposed Effluent Limitations Guidelines for
the Metal Products and Machinery Industry (Phase I). Office of Water.
Ref.l
-------
U.S. EPA (1991). U.S. Environmental Protection Agency 1989 Machinery Manufacturing and
Rebuilding Data Collection Portfolio. Metals Branch.
U.S. Executive Office of the President (1993). FY1993 Economic Report of the President.
Washington, D.C., January.
Value Line Publishing, Inc. (1991). Value Line Investment Survey. New York, New York.
Ref.2
-------
-------
------- |